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How Top Real Estate Fund Managers Are Preparing for a Post-Covid World – Barron's

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E-working could kill offices the same way e-commerce killed malls.


Timothy A. Clary/AFP/Getty Images

Not many people want to buy an office building in Manhattan right now with everyone holed up in their apartments during a pandemic. Such is the dilemma for today’s real-estate investors. And nowhere is this more apparent than in real estate-focused mutual funds.

Such investors are preparing for a future with fewer in-person meetings. “We think three to five years from now 20% of the workforce is gone on a daily basis from the existing standing inventory of office space,” says Burl East, manager of

Altegris/AACA Opportunistic Real Estate

(ticker: RAANX), adding that some people may work from home permanently while others will come and go from the office with more flexibility. “We think this is a permanent problem, and we would call it analogous in many ways to the mall situation a decade ago.”

In other words, e-working will kill offices the same way e-commerce killed malls. East is so sure of his thesis that he has established short positions to bet against New York office real-estate investment trusts

Vornado Realty Trust

(VNO),

SL Green

(SLG), and

Empire State Realty Trust

(ESRT).

East’s boldness has paid off. His fund’s 19.7% five-year annualized return beats 98% of his peers in

Morningstar’s

real estate category. According to the fund’s latest quarterly commentary, over 80% of its assets were in Covid-19 resistant sectors. Instead of the typical office, retail and lodging plays, East has 24% of his portfolio in computer system data centers such as China-based

GDS

(GDS), the fund’s fourth-largest holding at 6.4%.

“Demand for mobile data is growing at 45% per year in the U.S.,” East says. “Those numbers are probably two times that in China.” The country’s cloud and data center infrastructure is behind the U.S., East adds. “They’re just now ramping up where our data center companies were five to eight years ago, and GDS is at the forefront of that.”

GDS has a 60% three-year annualized return. Meanwhile, another 20% of Altegris/AACA’s portfolio is in telecom cell tower companies such as

American Tower

(AMT), which has an 19.3% three-year annualized return.

For other top-performing real estate managers, such strong performance has become problematic. After a long economic recovery beginning in 2009, manager Rick Gable of

MFS Global Real Estate

(MGLAX) was expecting a slowdown coming into 2020, so he “was willing to pay a higher multiple for a business model I thought was just rock solid, and accept some valuation risk for that comfort level.”

But Gable’s thinking has since changed, as the popularity of data centers, cell towers, e-commerce warehouses, and lab space has made those real-estate sectors a crowded trade. Noting the “tailwinds in those sectors, and headwinds in sectors like office and retail, lodging, skilled nursing and so on, I have to believe there’s some disconnect between sentiment and reality,” he says.

Gable is “barbelling” his portfolio by holding growth stocks like data center owner

Equinix

(EQIX) and industrial warehouse company

Prologis

(PLD) alongside beaten-up senior housing company

Welltower

(WELL), down 18% in the past 12 months.

“We’ve found safety in some cheaper valuations in companies that have been deeply impacted by the pandemic,” he says. While the pandemic has caused nursing home quarantines, the housing need for America’s aging population “is as strong as it has been, and probably is going to get stronger.”

The pandemic has exacerbated retail real estate’s suffering as e-commerce continues to grow. Yet the dynamics for the sector differ by geographic region. “There’s a different impact [from coronavirus] to malls in Latin America. They aren’t burdened by the department stores like in the U.S. They’re more of a form of entertainment—safe, clean, and air conditioned. And there’s a lot more draw to the malls there,” Gable says. The fund has a position in Mexican retail, office and industrial real estate conglomerate

Fibra Uno Administracion

(FUNO11.Mexico), down 22.5% in the past year.

Asia has been recovering quicker than the U.S. and Europe from the pandemic. Asian retailers are better-positioned from a supply and demand perspective, says co-manager Greg Kuhl of

Janus Henderson Global Real Estate

(JERTX). “There’s much less retail storefronts available there. And the [pandemic] recovery seems to be happening there sooner.” Three of Janus Henderson’s largest positions with commercial property exposure in China are

China Resources Land

(1109.HongKong),

Sun Hung Kai Properties

(16.HongKong), and

Shimao Group

(813.HongKong). All three were down in 2020 due to the pandemic.

Hotels are due for a comeback when the pandemic ends, investors say. “There is going to be pent up demand for business travel that is client based and also for the entertainment experience in general,” says manager Rick Romano of

PGIM US Real Estate

(PJEAX) “Leisure travel will pick up. When you look back at the [Spanish flu] pandemic in 1918, that led to the roaring ‘20s. People are just so eager to go out that we could see a period like that again from a leisure perspective.”

Romano holds

Apple Hospitality REIT

(APLE). Since the REIT runs smaller hotels such as

Hampton Inns

that don’t have much convention business subject to Covid restrictions, it will be “first to recover.” 

Although it’s impossible to pinpoint the travel recovery’s timing, Romano and other managers see the latter half of 2021 and early 2022 as when some of the pent-up demand will be realized.

But for offices, the world may never be the same.

Email: editors@barrons.com

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Here are some facts about British Columbia’s housing market

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Housing affordability is a key issue in the provincial election campaign in British Columbia, particularly in major centres.

Here are some statistics about housing in B.C. from the Canada Mortgage and Housing Corporation’s 2024 Rental Market Report, issued in January, and the B.C. Real Estate Association’s August 2024 report.

Average residential home price in B.C.: $938,500

Average price in greater Vancouver (2024 year to date): $1,304,438

Average price in greater Victoria (2024 year to date): $979,103

Average price in the Okanagan (2024 year to date): $748,015

Average two-bedroom purpose-built rental in Vancouver: $2,181

Average two-bedroom purpose-built rental in Victoria: $1,839

Average two-bedroom purpose-built rental in Canada: $1,359

Rental vacancy rate in Vancouver: 0.9 per cent

How much more do new renters in Vancouver pay compared with renters who have occupied their home for at least a year: 27 per cent

This report by The Canadian Press was first published Oct. 17, 2024.

The Canadian Press. All rights reserved.

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B.C. voters face atmospheric river with heavy rain, high winds on election day

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VANCOUVER – Voters along the south coast of British Columbia who have not cast their ballots yet will have to contend with heavy rain and high winds from an incoming atmospheric river weather system on election day.

Environment Canada says the weather system will bring prolonged heavy rain to Metro Vancouver, the Sunshine Coast, Fraser Valley, Howe Sound, Whistler and Vancouver Island starting Friday.

The agency says strong winds with gusts up to 80 kilometres an hour will also develop on Saturday — the day thousands are expected to go to the polls across B.C. — in parts of Vancouver Island and Metro Vancouver.

Wednesday was the last day for advance voting, which started on Oct. 10.

More than 180,000 voters cast their votes Wednesday — the most ever on an advance voting day in B.C., beating the record set just days earlier on Oct. 10 of more than 170,000 votes.

Environment Canada says voters in the area of the atmospheric river can expect around 70 millimetres of precipitation generally and up to 100 millimetres along the coastal mountains, while parts of Vancouver Island could see as much as 200 millimetres of rainfall for the weekend.

An atmospheric river system in November 2021 created severe flooding and landslides that at one point severed most rail links between Vancouver’s port and the rest of Canada while inundating communities in the Fraser Valley and B.C. Interior.

This report by The Canadian Press was first published Oct. 17, 2024.

The Canadian Press. All rights reserved.

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No shortage when it comes to B.C. housing policies, as Eby, Rustad offer clear choice

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British Columbia voters face no shortage of policies when it comes to tackling the province’s housing woes in the run-up to Saturday’s election, with a clear choice for the next government’s approach.

David Eby’s New Democrats say the housing market on its own will not deliver the homes people need, while B.C. Conservative Leader John Rustad saysgovernment is part of the problem and B.C. needs to “unleash” the potential of the private sector.

But Andy Yan, director of the City Program at Simon Fraser University, said the “punchline” was that neither would have a hand in regulating interest rates, the “giant X-factor” in housing affordability.

“The one policy that controls it all just happens to be a policy that the province, whoever wins, has absolutely no control over,” said Yan, who made a name for himself scrutinizing B.C.’s chronic affordability problems.

Some metrics have shown those problems easing, with Eby pointing to what he said was a seven per cent drop in rent prices in Vancouver.

But Statistics Canada says 2021 census data shows that 25.5 per cent of B.C. households were paying at least 30 per cent of their income on shelter costs, the worst for any province or territory.

Yan said government had “access to a few levers” aimed at boosting housing affordability, and Eby has been pulling several.

Yet a host of other factors are at play, rates in particular, Yan said.

“This is what makes housing so frustrating, right? It takes time. It takes decades through which solutions and policies play out,” Yan said.

Rustad, meanwhile, is running on a “deregulation” platform.

He has pledged to scrap key NDP housing initiatives, including the speculation and vacancy tax, restrictions on short-term rentals,and legislation aimed at boosting small-scale density in single-family neighbourhoods.

Green Leader Sonia Furstenau, meanwhile, says “commodification” of housing by large investors is a major factor driving up costs, and her party would prioritize people most vulnerable in the housing market.

Yan said it was too soon to fully assess the impact of the NDP government’s housing measures, but there was a risk housing challenges could get worse if certain safeguards were removed, such as policies that preserve existing rental homes.

If interest rates were to drop, spurring a surge of redevelopment, Yan said the new homes with higher rents could wipe the older, cheaper units off the map.

“There is this element of change and redevelopment that needs to occur as a city grows, yet the loss of that stock is part of really, the ongoing challenges,” Yan said.

Given the external forces buffeting the housing market, Yan said the question before voters this month was more about “narrative” than numbers.

“Who do you believe will deliver a better tomorrow?”

Yan said the market has limits, and governments play an important role in providing safeguards for those most vulnerable.

The market “won’t by itself deal with their housing needs,” Yan said, especially given what he described as B.C.’s “30-year deficit of non-market housing.”

IS HOUSING THE ‘GOVERNMENT’S JOB’?

Craig Jones, associate director of the Housing Research Collaborative at the University of British Columbia, echoed Yan, saying people are in “housing distress” and in urgent need of help in the form of social or non-market housing.

“The amount of housing that it’s going to take through straight-up supply to arrive at affordability, it’s more than the system can actually produce,” he said.

Among the three leaders, Yan said it was Furstenau who had focused on the role of the “financialization” of housing, or large investors using housing for profit.

“It really squeezes renters,” he said of the trend. “It captures those units that would ordinarily become affordable and moves (them) into an investment product.”

The Greens’ platform includes a pledge to advocate for federal legislation banning the sale of residential units toreal estate investment trusts, known as REITs.

The party has also proposed a two per cent tax on homes valued at $3 million or higher, while committing $1.5 billion to build 26,000 non-market units each year.

Eby’s NDP government has enacted a suite of policies aimed at speeding up the development and availability of middle-income housing and affordable rentals.

They include the Rental Protection Fund, which Jones described as a “cutting-edge” policy. The $500-million fund enables non-profit organizations to purchase and manage existing rental buildings with the goal of preserving their affordability.

Another flagship NDP housing initiative, dubbed BC Builds, uses $2 billion in government financingto offer low-interest loans for the development of rental buildings on low-cost, underutilized land. Under the program, operators must offer at least 20 per cent of their units at 20 per cent below the market value.

Ravi Kahlon, the NDP candidate for Delta North who serves as Eby’s housing minister,said BC Builds was designed to navigate “huge headwinds” in housing development, including high interest rates, global inflation and the cost of land.

Boosting supply is one piece of the larger housing puzzle, Kahlon said in an interview before the start of the election campaign.

“We also need governments to invest and … come up with innovative programs to be able to get more affordability than the market can deliver,” he said.

The NDP is also pledging to help more middle-class, first-time buyers into the housing market with a plan to finance 40 per cent of the price on certain projects, with the money repayable as a loan and carrying an interest rate of 1.5 per cent. The government’s contribution would have to be repaid upon resale, plus 40 per cent of any increase in value.

The Canadian Press reached out several times requesting a housing-focused interview with Rustad or another Conservative representative, but received no followup.

At a press conference officially launching the Conservatives’ campaign, Rustad said Eby “seems to think that (housing) is government’s job.”

A key element of the Conservatives’ housing plans is a provincial tax exemption dubbed the “Rustad Rebate.” It would start in 2026 with residents able to deduct up to $1,500 per month for rent and mortgage costs, increasing to $3,000 in 2029.

Rustad also wants Ottawa to reintroduce a 1970s federal program that offered tax incentives to spur multi-unit residential building construction.

“It’s critical to bring that back and get the rental stock that we need built,” Rustad said of the so-called MURB program during the recent televised leaders’ debate.

Rustad also wants to axe B.C.’s speculation and vacancy tax, which Eby says has added 20,000 units to the long-term rental market, and repeal rules restricting short-term rentals on platforms such as Airbnb and Vrbo to an operator’s principal residence or one secondary suite.

“(First) of all it was foreigners, and then it was speculators, and then it was vacant properties, and then it was Airbnbs, instead of pointing at the real problem, which is government, and government is getting in the way,” Rustad said during the televised leaders’ debate.

Rustad has also promised to speed up approvals for rezoning and development applications, and to step in if a city fails to meet the six-month target.

Eby’s approach to clearing zoning and regulatory hurdles includes legislation passed last fall that requires municipalities with more than 5,000 residents to allow small-scale, multi-unit housing on lots previously zoned for single family homes.

The New Democrats have also recently announced a series of free, standardized building designs and a plan to fast-track prefabricated homes in the province.

A statement from B.C.’s Housing Ministry said more than 90 per cent of 188 local governments had adopted the New Democrats’ small-scale, multi-unit housing legislation as of last month, while 21 had received extensions allowing more time.

Rustad has pledged to repeal that law too, describing Eby’s approach as “authoritarian.”

The Greens are meanwhile pledging to spend $650 million in annual infrastructure funding for communities, increase subsidies for elderly renters, and bring in vacancy control measures to prevent landlords from drastically raising rents for new tenants.

Yan likened the Oct. 19 election to a “referendum about the course that David Eby has set” for housing, with Rustad “offering a completely different direction.”

Regardless of which party and leader emerges victorious, Yan said B.C.’s next government will be working against the clock, as well as cost pressures.

Yan said failing to deliver affordable homes for everyone, particularly people living on B.C. streets and young, working families, came at a cost to the whole province.

“It diminishes us as a society, but then also as an economy.”

This report by The Canadian Press was first published Oct. 17, 2024.

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