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    U.S. real estate – no more “low hanging fruit”

    The U.S. real estate market is once again attracting investor interest and there is an abundance of mortgage money available to buyers. Investors in the commercial and multi-family housing sectors appear confident the market recovery is real and sustainable. As a result, prices for these types of properties have been rising.

    The multi-family sector (i.e. apartment buildings) has been one of the strongest performers for many reasons – not the least of which is that since the financial crisis many Americans have abandoned the dream of home ownership.

    MoodysChart PCS 2014 300x241 U.S. real estate – no more “low hanging fruit”We have been investing in the U.S. multi-family space since 2011 and our clients now have interests in apartment buildings in Texas, Georgia, Florida and Tennessee. Our goal was to build a diversified portfolio of properties that would capture an attractive yield and a meaningful capital gain. The capital gain would be the result of both a recovering real estate market and strong growth in rents. Our experience to date has been very positive and if anything, the market has recovered more quickly than we anticipated.

    Venterra Realty, a specialty real estate investment company investing in multi-family residential communities in the southern United States, has been an important partner for Newport Private Wealth in this program.

    John Foresi, CEO, co-founder and director of Venterra, was in our office recently to provide an investment update. He reviewed the changes in the U.S. real estate market in the five years following the financial crisis of 2008.

    In his view, the market was frozen in 2009-2010. There was little activity – mortgage money was scarce and buyers and sellers were paralyzed by the dramatic price declines. For many, it was a game of survival and there were few buyers with money and conviction. Venterra had both.

    By 2011, the market had stabilized and bargain hunters had returned. But only the “best-financed” buyers were in the game as mortgage money remained very scarce. The majority of U.S. lenders were reducing their balance sheets and most doors were shut for new borrowers. For well-financed buyers like Venterra, the 2011-12 period was, according to John, akin to “shooting fish in a barrel.”  In retrospect, he wished that they had been more aggressive, but hindsight is 20/20 and our view is that it is better to be conservatively opportunistic than take on too much risk.

    By 2013, investors of all kinds were back looking for yield and the supply of mortgage money had improved dramatically. The result? “Cap rates” for multi-family projects fell to 5.75% from 6.75%. While this may not seem like much, it means that prices increased 18%! (Note: commercial real estate is valued using a “capitalization rate” i.e. “cap rate”. The lower the cap rate, the higher the price.)

    In John’s view, there is now little left in the way of “low hanging fruit” in the multi-family sector. He reminded us that it is more essential than ever to “buy well, use moderate leverage and be prepared to wait it out if needed.”

    He also reminded us that Venterra has a number of meaningful competitive advantages. They have an unblemished record as a reliable buyer that can close quickly. Quite often, they have bought buildings after the winning bidder failed to close. They are also able to assume existing mortgages. Mortgage lenders are very reluctant to transfer mortgages to new buyers. As a result, an existing mortgage is often viewed as a “negative” and it eliminates many potential buyers from the bidding process; an advantage for well-capitalized buyers like Venterra.

    Finally, there continues to be “underperforming” properties for sale due to absentee ownership or deferred maintenance. In these cases, Venterra’s strategy is twofold. They believe that their operational expertise will improve occupancy and rental rates. In addition, they have the ability to raise enough money to upgrade the property. If successful, the result is increased annual income and a higher sale price in 5 to 6 years.

    WestoverOaks U.S. real estate – no more “low hanging fruit”

    Westover Oaks, San Antonio, TX, acquired Dec. 2012

    Overall, John remains confident that he and his team can continue to secure attractive opportunities for us to consider and invest in for our clients. Success will be less about falling cap rates and more about value-added strategies to increase the net income from each property.

    Meet the asset class specialists

    We hosted our semi-annual Meet the Pros event last week in Toronto where clients had an opportunity to meet some of the independent asset class specialists we retain for specific components of the portfolios we manage. This year’s panel of pundits included Maureen Farrow of Economap (our independent economist), Tye Bousada of Edgepoint Investment Group and John Foresi of Venterra Realty –specialists in global equities and U.S. real estate respectively.

    The key takeaways in my view were:

    • the recovery from the of 2007/08 financial crisis is on a good path and has slow but steady momentum;
    • after a strong run-up in both equity and real estate prices; be very careful not to overpay

    [read more >>]

    Looking for income? Try looking south.

    b88c908598614c50b4792285133b98d8 florida 150x150 Looking for income? Try looking south.We look everywhere for income.

    Throughout our history, we have been able to earn attractive income-based returns for our clients ranging from the conventional (i.e. corporate bonds) to the hard to access (i.e. mezzanine debt on a privately-owned self-storage business).

    We are not alone in the pursuit of income.  Investors throughout the world have been seeking yield in an era of low economic growth and mediocre equity returns.  As a result, money has flooded into every popular idea and driven up the prices and, regretfully, driven down yields.

    Specifically, a lot of money has flowed into Canada’s real estate market – a sector that has been a reliable source of income for us and other investors. Much of the interest has come from overseas.  Foreign investors have liked our real estate, our economy, our currency and our stable political environment.  This inflow of capital has pushed up prices to the point that we now think there are more significant risk/reward opportunities elsewhere. [read more >>]

    Finding investment opportunities when the economy isn’t handing them out

    iStock 000014863867Medium priv eq banner 300x94 Finding investment opportunities when the economy isnt handing them outLast week, we organized a lunchtime panel with four outstanding financial minds that are part of the pool of talent we have to draw on for the management of client investment portfolios:

    • Maureen Farrow, (economist), President, Economap
    • Tye Bousada, (global equities), President & Co-CEO, Edgepoint Investment Group Inc.
    • Rick Grafton, (energy), CEO, Grafton Asset Management
    • Corrado Russo, (real estate), Managing Director, Global Securities and Investments, Timbercreek Asset Management Inc.

    It was a lengthy and meaty conversation about the state of the global economy, how Canada is faring and what it all means for clients of Newport Private Wealth. This summary won’t fully do justice to the depth and scope of the presentations, but we will try to boil a 90 minute discussion down to a readable blog post for you.
    [read more >>]

    Landlord or investor?

    i ea075cba0d2eb850555a932785b9b21c RE White paper st catherines ON Landlord or investor?Readers of this blog will know that we have written a lot about investing in real estate — commercial, multi-residential, etc.   We like the asset class for its diversification, cash flow, capital appreciation potential and inflation protection.  So we decided to share some of our thinking in this white paper Real returns from real assets: How to profit from investment in multi-residential real estate.

     

    In it we discuss how Canada’s demographics favour apartment rentals; why the market is ripe for consolidation; along with the pros and cons of various investment options.  Hope you enjoy it.  Feel free to send us a note if you have any comments or questions.

    Real returns from real estate assets

    i 6a4f402c00bd01a106d1a0e608bee0e4 75 Broadway Real returns from real estate assetsHow many of us have toyed with the idea of owning real estate investment property? After all, there’s some appeal to hard assets you can ‘touch and feel’. They generate monthly cash flow from rents, generally appreciate in value over time and can offer protection against inflation. What’s not to like?

    But then you start to think about what it’s like to be a landlord — the phone calls in the middle of the night about a broken furnace,  the capital requirements to maintain the property’s value, the concentration risk — most of us decide it just isn’t worth it.

    [read more >>]

    Florida real estate … why I’d rather rent than own

    i 050bc674c50db4b1aa95e31fa2481b3d Florida real estate Florida real estate ... why Id rather rent than ownA recent article by Dianne Nice of the Globe & Mail, For aspiring snowbirds, it’s a great time to feather your U.S. nest quotes David Keats, a cross border financial planner,as  saying that in his 30 years of practice he has never seen more favourable conditions for purchasing U.S. real estate. Perhaps it’s true, but just because it’s cheap doesn’t mean it won’t get cheaper… perhaps a lot cheaper.

    [read more >>]