I've been following closely the events last week and this as it affects our Fund business and business strategy very directly.
The Yuan "float":
The announcement to allow the Yuan to be de linked from the dollar and presumably rise is a very significant step even if it’s not true liberation for the Yuan.
The "flexibility" now allowed for isn't yet reflective of the result, as the Chinese have at least for now kept the rate at the same level, indicating only a gradual change so as not to be disruptive to their concerned domestic population.
Not surprising, as significant upward movement isn't in China's interest domestically or for the value of its huge sovereign bond investments abroad .
And I don't believe long term in the US best interest.
The pressure for this move from western economies would at best provide a short term boost and easing of political issues at home.
Long term I feel it’s unwise.
We are globally tied economies. Like one "big disorganized EU" in which the two biggest players the US and China are bound.
That means for the first time in a very long time a second real global player has emerged, China, and that's not going to change.
These are the two largest unified markets in the world. The only markets which control so much of the world's economy.
For now the US dwarfs everyone. But inevitably that's going to become a much more complicated measure.
I think the ability of the Yuan to now move is a cautionary event.
And a precursor to something much more dramatic.
Inevitable upward movement in the rate will ultimately have the effect of increasing inflationary pressure globally and more continuously then we've experienced before.
Effect on Real Estate globally:
That means a continuing and accelerating upward pressure on commodity pricing and products reliant on them.
And that very much includes real estate.
Against the backdrop of the financial crisis we may forget what was just beginning to happen in 2000-2006 to the true (not leveraged) value of commercial real estate.
It was increasing at roughly 15-20% a year on just the escalating replacement cost of quality office buildings because literally what they are made of concrete, steel, glass were increasing in cost and value.
That beginning to occur again already.
Further commercial property revenues and therefore investments are indexed to inflation.
In this volatile financial market, investments in good quality income producing properties becomes a prudent and inflation indexed, high yielding investment. It’s therefore more important not just for institutional portfolios but individuals too.
Risk Management:
We are very focused on risk and cyclical investment strategies in real estate investing.
For example we are among the first in our industry to employee a investment hedging strategy in commercial real estate investing.
In 2001 I deliberately invested in Houston as a hedge against oil/energy costs, our largest single expense line item.
That proved a very profitable move, particularly in 2008, when we sold Houston as oil prices globally were peaking.
We are low leveraged because I'm risk adverse in an inherently risky investment industry.
Low leverage keeps our financial structure safe, sound and sane.
And it’s the ultimate financial hedge.
We have operating policies which limit tenant size - so we don't have the tenant risk others take.
I buy Class A assets only, below replacement cost only, usually in capital deprived markets.
Today, temporarily that's the whole United States office market.
The greatest bargain in the world.
That's the ultimate buy low/sell high market. And that strategy has always been our focus.
This is simply one of the best office investment markets of my career.
Inflation and commodities pressures Globally:
It’s not just China, but the rest of the emerging world in Asia, Brazil, the Middle East that pressure the world's limited resources.
The global silent majority economies are going to be heard in louder economic voices, and their effects on global resources and resource consumption will increase.
That by definition is core inflation.
Which suggests emerging markets, especially those rich in essential commodities are good long term investments.
Effects of the Yuan rising on investing:
As we see a slight drag on Chinese exports and western economies are slightly better positioned to export, I think we'll see accelerating and continuous inflationary pressure, especially on
commodities.
Overall price levels will rise.
One prime example is that as commodity prices rise the value and replacement costs of buildings, capital equipment and similar commodity related priced goods will rise.
Companies involved in those sectors, which profit from such price moves, will be especially good investments.
I'd also move an investment portfolio towards away from any traditional industry laggards and into scarce goods sectors and companies whose returns are correlated to raw materials costs.
That's much broader than the obvious mining and energy sectors, and includes transportation and logistics, and companies focused on new technologies affecting efficiency.
Cutting edge technology companies, energy sector, green and recycling industries, both small and large scale, including companies like GE and similar positioned companies.
I'd move away from non indexed investment of all kinds - bonds or anything reliant on long term fixed return.
I'd move more heavily into equities, and especially alternative investments in Funds that either focus on the industries I mentioned previously: real estate and the sectors and special situation Funds.
With a growing unserved market globally (particularly in the emerging markets), I'd invest in healthcare and healthcare delivery companies.
The financial services industry will include a range of nimble profitable firms and large, slow reacting losers.
On the financial products side expect to see vibrancy in derivative hedging products in the categories for general inflation and commodities. ETF's are one example.
For our purposes in real estate this competition for resources means replacement costs are set to increase and will have an strong positive effect on value of commercial real estate.
We are diversifying our holdings into energy and commodities affected markets as a positive hedge against inflation on the cost side of our investments and into rapidly growing markets on the revenue side.
We see 15% - 20% annual returns in commercial real estate on a safe financial structure, as very achievable.
