Real Assets Adviser

September 1, 2023: Vol. 10, Number 8

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From the Current Issue

Spin cycle: Floating offshore wind turbines coming to the United States

Riding a wave of limitless possibilities, floating offshore wind turbines could be a prominent source of renewable energy soon. Several deepwater “floaters” are already in operation around the world — primarily in Europe — and plans are in motion for the first such U.S. project.

The cost of being too liquid: What is the illiquidity premium, and how can investors and their advisers intelligently maximize their exposure?

Legendary investor David Swensen famously stated the “intelligent acceptance of illiquidity and a value orientation constitutes a sensible, conservative approach to portfolio management.” What Swensen, and so many other sophisticated investors recognized, is the illiquidity premium available by allocating capital to illiquid investments such as private equity, private credit and private real estate.

Playing agricultural chess: Computer science can help farmers explore alternative crops and sustainable farming

Humans have physically reconfigured half of the world’s land to grow just eight staple crops: maize (corn), soy, wheat, rice, cassava, sorghum, sweet potato and potato. They account for the vast majority of calories that people around the world consume. As global population rises, there’s pressure to expand production even further. Many experts argue that further expanding modern industrialized agriculture — which relies heavily on synthetic fertilizer, chemical pesticides and high-yield seeds — isn’t the right way to feed a growing world population. In their view, this approach isn’t sustainable ecologically or economically, and farmers and scientists alike feel trapped within this system.

The connected experience: Challenges and opportunities in the telecommunications sector

Telecommunications infrastructure supports a wide array of business, government and economic services, but not all people have access. Obstacles such as the “digital divide” bring challenges to telecom companies, which also proves to be challenging for investors focused on making commitments to the telecommunications space. This leads to a question: How are infrastructure investors working to bring these services to more people to help grow markets and deliver on the social goal of universal access?

Regulation Update: PE and hedge funds brace for new SEC rules

Private equity and hedge funds are bracing for what could be the biggest regulatory challenge in years to their business of managing money for deep-pocketed investors. The SEC is preparing to adopt a rule package as soon as this month, aiming to bring greater transparency and competition to the multi-trillion-dollar private-funds industry, people familiar with the matter said. SEC chairman Gary Gensler has said he hopes to bring down fees and expenses that cost hundreds of billions of dollars a year.

Profile: Bob Long, CEO of StepStone Private Wealth

Bob Long was adopted six weeks after his birth by Bob and Ann Long. His younger sister Ann (more commonly referred to as “AB”) was adopted a few weeks after her birth. Both adoptions were managed by Children’s Home Society of North Carolina. In the adoption realm, the day parents pick up their adopted child is called the child’s Chosen Day. In Long’s case, that was March 21. The psychological weight or insecurity of having been handed off by one’s birth parents — common to adopted children — never exerted itself on Long, who calls his adoption a “massive advantage.”

Power struggle: Battle between U.S. and China taken to ocean depths

Add undersea cables to the growing list of flashpoints between the United States and China. Until recently, American companies dominated this critical area of communications infrastructure — all 900,000 miles of them, snaking across ocean floors, serving as the internet’s circulatory system, transporting the world’s data, communications, financial transactions, and even military and diplomatic traffic.

Repurposing office buildings: Yes, they can be converted to residential buildings, but it won’t be cheap

Since the COVID-19 pandemic began, more companies have offered remote work options for their employees, or have even switched to working entirely remotely, leaving empty office buildings a new fixture in many cities. In July 2023, Boston’s Planning and Development Agency announced a pilot program to offer incentives to building developers who convert office buildings to residential housing.

Mexico is poised to ride the nearshoring wave

The world economy is realigning, with trade and supply chains becoming less decentralized and less deeply interconnected as globalization slows, or even reverses, in a multipolar world. Mexico, in particular, could be a major beneficiary of this shift to “slowbalization.” Among other reasons, the United States is likely to look to allies that are geographically close and politically aligned as trade tensions, supply-chain difficulties and geopolitical concerns push the United States further from China.

De-bunking commercial real estate’s doomsday delusion

For months a rising chorus has proclaimed the death of U.S. commercial real estate — and the banks that lend on it. Naysayers fear a “doom loop” of falling prices and contracting credit, leading to further losses. The concern is understandable: Like most asset classes, real estate has suffered from higher interest rates. Bank failures — though not caused by real estate — have underscored the risks posed by longer-duration assets to liquidity and balance sheets. And high-profile defaults in Los Angeles, San Francisco and New York have raised the specter of mounting distress. Much of the recent anxiety stems from profound misconceptions, in my view. Consider the following:

Most industry professionals are not as skilled as they think at judging risk

In 2009, Geoff Colvin, an award-winning author and business writer for Fortune magazine, published a book titled The Upside of the Downturn. His chapter on risk was particularly enlightening and probably just as applicable to what’s going on today as it was to what was going on then, in the wake of the global financial crisis. Six months before the events that triggered the beginning of that global financial crisis, a firm called Protiviti published its 2007 annual Risk Barometer. The report surveyed 150 top-level executives from large U.S. companies about their attitudes regarding risk. It asked, “How effectively does your company identify and manage all potentially significant risks?”

Beyond multifamily: Though the apartment sector has performed big, there are often overlooked housing sectors that investors would do well to add to the mix

Investors have been plowing billions into U.S. multifamily housing for years running — $648 billion during 2021-2022 alone, according to MSCI Real Assets — and for good reason: The returns have been good if not lavish. But the housing market has changed significantly in recent years. The COVID-19 pandemic displaced many and accelerated the trend toward home-based remote work. Home prices have increased sharply and become more competitive. Mortgage rates have risen.

Space-based solar is making strides

The California Institute of Technology — the same institution associated with the likes of Richard Feynman, Robert Oppenheimer and William Shockley — has big news for space-based power. Researchers at the university have reportedly beamed solar power from space to Earth — and they say it’s a first. The experiment is a part of Caltech’s Space Solar Power Project, and the researchers conducted the power transfer experiment using microwave technology. The researchers say microwave transmitters successfully beamed solar power collected in space to a receiver on the rooftop of Gordon and Betty Moore Laboratory of Engineering building on Caltech’s campus in Pasadena.

Why global real estate investors should set their sights on India’s life sciences sector

The Indian economy continues to perform in a way that many other countries can only envy. The real growth in GDP for the most recent fiscal year, which ended in March, beat market expectations at 7.2 percent, making it among the fastest-growing large economies in the world. And economists expect growth to remain solid, with forecasts ranging between 6.0 percent and 6.5 percent for the next two fiscal years.

Tax Update: The tax advantages of different types of trusts

If you’ve been estate planning, you’ve probably come across the idea of setting up a trust. Trusts are flexible and diverse legal entities that you can use to achieve various estate planning goals, including reducing your estate tax burden. A critical — and often overlooked — consideration when selecting a trust for a particular purpose is the trust’s tax treatment. Tax planning is one of the most critical aspects of financial planning, and this can be especially true when it comes to trusts. Each type of trust offers different tax advantages and potential drawbacks, and the tax implications of each trust class vary. Depending on your unique financial situation and specific goals, different types of trusts may be more or less appropriate.

Talking Points: Quotations from people in the news

Will Silverman, managing director at Eastdil Secured, a real estate investment bank: “In New York, buildings are selling for less than the value of the land they sit on. We are seeing prices lower than they have been in 20 years in absolute dollar terms.

Vacancy at the tower: Property values and sales volumes slammed by vacant office space

Office REITs have continued to sell off in recent weeks, coinciding with news that metro office property sales have slowed to a trickle. Moreover, the buildings that can be sold are increasingly being offloaded at steep discounts. Delinquency rates remain relatively low, but ticked up in the first quarter, as occupancy continues to be subdued.

The suburbs have become multifamily’s new land of opportunity

The American Dream is often depicted as purchasing a home in the suburbs, complete with a perfectly manicured lawn and a white picket fence. That dream, however, is no longer just for homeowners. While many cite the COVID-19 pandemic as the trigger for the recent renter-fueled “flight to the suburbs,” the trading of downtown apartments for more spacious, affordable options located farther away from city centers was merely accelerated by it, continuing a long-term trend that multifamily investors and developers have tracked for decades.

The multifamily moment: Interest rates motivating owners to sell or walk away

In any shifting market cycle, there are winners and losers. How can you be a winner? Can it be as easy as buy low, sell high? In a word, yes. But to buy good assets at an opportune time requires knowing what to buy, who to partner with, and when. There are a number of market factors lining up to provide the types of buying opportunities we have not seen since 2009. Current capital markets disruption and the rapid rise of interest rates on the heels of a prolonged period of cap rate compression and strong asset valuations is putting a large number of owners in a position to need to potentially sell assets.

Allocations to global alternative top $740 billion

There is no slowdown in capital deployed to alternative investments globally, according to Dasseti and Alternatives Watch Research in its 2023 Manager Compendium research report. Following a review of six asset classes across private markets, including private equity, venture capital, hedge funds, private credit, real estate and infrastructure, about $746 billion was either deployed or committed during the 12 months ending March 31, 2023.

Advisers still lack faith in alts and are wary of their illiquidity

While there is interest in alternative investment products, there are still significant concerns, namely their lack of liquidity and overall cost. What’s more, some planners have indicated a general lack of trust in the ability of these products to meet clients’ needs.

Alliance of real estate associations launches global diversified index

ANREV, INREV and NCREIF have launched the first Global ODCE Index, which is the latest in a suite of global indices aimed at enhancing the transparency of the nonlisted real estate investment industry. The new index focuses on open-end diversified core equity funds across all three global regions. The new index, with a combined total gross asset value of $403 billion, is expected to further transparency and drive capital to the nonlisted real estate sector.

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