Learning To Trust Real Estate Again * Ally Bank * California’s Ongoing Challenges

Once Bitten: Learning to Trust Real Estate Again

The housing bust burned real-estate investors. Even more frightening, many investors were blindsided by the bust because “credible” officials as high up as then -Federal Reserve Chairman Alan Greenspan were convincing them housing was immune to speculative bubbling. At some point, however, investors will be wise to forgive the real-estate market and reintroduce real-estate assets into their investment portfolio. Many signs are starting to strongly suggest that the time to do so may be right around the corner.

The housing bubble was the beginning of a lot of hardship, but it also sparked an onslaught of once-in-a-lifetime investment opportunities. Historically, real estate has acted as a hedge against the erratic actions of portfolios overloaded with stocks and bonds. But, which real-estate investment option has the best chance of performing well as our economy fights through a recovery? This question brings up a key point: Those who will capitalize on the upcoming real-estate investment opportunities will be those who are knowledgeable, current and responsive.

One market that is looking to explode with investment possibilities is that of commercial real estate. According to Foresight Analytics, a total of $1.4 trillion in commercial real-estate loans on U.S. properties will be coming due over the next five years. Therefore, troubled commercial real estate is and will continue to be actively searching for responsive investors. Those with the wherewithal to complete their due diligence and supply the capital are likely to be well compensated. However, getting involved in commercial real estate can be complicated.

The easiest way to break into the asset class is to do so through a real estate investment trust (REIT). According to a recent cover story in Forbes:

The highest-yielding stocks in the real estate universe are property-owning REITs, which are in business to collect rent and pass the money along to shareholders. … All REITs have the same basic objective: buy property and put it to ‘higher and better use.’[i]

Over the next five years an abundance of low-cost mortgages issued earlier in the decade will be expiring and owners of commercial properties will be actively searching for fresh capital. Anticipating a market soon to be filled with distressed commercial properties, many REITs across the country have started to raise new equity. In order to conserve money, many REITs have cut dividends, but investors wise enough to get involved are still currently soaking up average dividend yields of 7.3 percent.[ii]

With the previously mentioned $1.4 trillion in commercial real-estate loans coming due in the next five years, investors with available capital will be faced with enormous investment opportunities. The banks that created the loans do not appear to have the means to refinance them. This will leave the owners of the commercial loans anxious to attract new capital or sell at close-out prices. The REIT industry, which is currently active in purchasing and improving distressed commercial properties, offers educated investors a relatively easy way into the world of commercial real-estate investing. Plus, REITs usually own dozens of commercial properties, which often enables them to weather turbulent economic times. But remember, commercial real-estate investing can be complicated, no matter which flavor you choose. So always analyze your risk. Also, be weary of “experts” trying to convince you that any market is invincible or immune to any investing fundamental.

Not a Bank, an Ally

As far away from banks as Ally tries to position itself, the truth it, it is still a bank. Built up from the ashes of GMAC Bank, Ally is striving to push banking “in a new direction.” With transparency as its crutch, Ally is an online banking institution pleading for the public to see right through it.

In May, with General Motors seeking to file Chapter 11 bankruptcy, GMAC Financial Services hurriedly changed the name of its bank from GMAC Bank to Ally. Not wishing to be linked to the failing auto company, GMAC Financial Services underwent an intense marketing makeover to create a banking image that people could trust. Although potential customers may still be furious with the government bank bailout, Ally promises to take other frustrations out of banking.

One of Ally’s many advertising messages boasts, “No monthly fees. No minimums. No sneaky disclosures. No kidding.” Another asks, “What is your bank trying to sneak by you?” Ally’s mission statement claims it is a bank “that values integrity as much as deposits.” But, is this accountability too little, too late?

In an effort to prove to customers that it is not just a product of a high-priced marketing effort, Ally is heavily promoting a no-penalty certificate of deposit. The CD, which touts a two-percent, one-year annual percentage yield, is one of the most competitive currently in the market.

In times when the economy is bringing honesty to the surface of nearly every business, is it better to go with one that overtly claims to be straightforward or one that was all along? Obviously, the latter is much more difficult to find. Ally claims it is “always going to give it to you straight,” but will what they are giving amount to more than round-the-clock customer service, straightforward language and clever TV commercials?

A Spotlight the Size of California

Lately, the nation has looked to California to witness the opening of the worst wounds this recession has to offer. Being the epicenter of the housing collapse intensified California’s existing problems and brought its house of cards down to a heaping mess. The Golden State’s unemployment rate is more than two percentage points higher than the national average of 9.5 percent. The state government has issued IOUs in place of tax returns, student grants and payments to creditors. Governor Schwarzenegger is constantly involved in seemingly-endless negotiations with legislative leaders. Credit agencies have started to downgrade the rating on the state’s debt. The state’s student-teacher ratio is more than 30 percent above the national average and appears to be rising. And, grimmest of all, the state faces an estimated $26 billion-dollar budget gap for the current fiscal year.

The entire country was hit by the current recession, but California was mauled. While 48 states face budget deficits, none of them are as severe as California’s. The state was hit from nearly all directions, but, from my view, California appears to have two major hurdles to overcome.

First, the state is unfriendly to business. Last month, CNBC released results from a survey it conducted concerning the best states in which to operate a business. California ranked second to last in business friendliness, cost of business and cost of living. In this year’s survey, even Hawaii passed California in terms of business friendliness. In fact, the only state with harsher legal and regulatory framework was West Virginia, for the second year in a row. Overall, California ranked 32nd. The state was pulled higher up because of its superiority in technology and innovation. Also, the state that makes up one-eighth of our economy did rank first in something else: access to capital, something that certainly cannot continue.[iii]

The second major obstacle I see is Californians expect a plethora of government-funded services but they are unwilling to sustain the tax threshold required to keep them running. This obstacle also faces our country as a whole. Our aging population requires an increase in Medicare and Social Security spending, yet no one wants to foot the bill. In May of this year, the California Legislature left tax increases in the hands of the voters and, not surprisingly, the voters rejected them. After all, the state’s income tax rates and motor vehicle registration fees are already among the highest in the country. With California already drowning deeply beneath its own problems, budget cuts were the only other viable possibility. The spending cuts approved this year “equal almost 30 percent of the general revenue fund and will affect schools, prisons, colleges and welfare.”[iv]

California’s appealing creative environment has caused inventive people to flock there for decades. But, with California’s system in shambles, residents may find it easier to relocate than to restructure. California’s ideal weather may not prove to be enough to attract the creative people needed to pull the state from its current slump.

[i] See Fitch, Stephane. (2009, August 3rd). Liquid Real Estate. Forbes, 38.

[ii] Ibid.

[iii] See http://www.cnbc.com/id/31763805

[iv] See http://www.realclearpolitics.com/articles/2009/08/03/californias_reckoning_and_ours_97735.html

About TomPowell

Senior Managing Partner of Resolute Capital Partners. As chief strategist I combine my education and proven expertise in raising private capital, innovative deal structure, risk mitigation, portfolio management, and distressed debt recovery to lead the Resolute Capital team in building a cross-pollination program of Foreign Direct Investment between Asia and the United States. In 1999, I founded and led the growth of ELP Capital, Inc, a mortgage banking investment company. In addition I served as the Senior Managing Director for ELP Capital’s affiliated investment company - ELP Capital Advisors, a Registered Investment Advisor for the ELP Capital Family of Funds, Institutional Investors, and wealthy individuals. I began my career with Wells Fargo Bank when I was recruited in 1988 for a management position in business banking for the Silicon Valley market. I was instrumental in the architecture, development, and initial application of Wells Fargo's Officer Sales Training programs, led two separate branch offices to top 5 overall rankings, and in 1990 was named as one of the youngest Vice Presidents in the Company’s 140-year history. I am a widely sought after speaker, international guest lecturer, and am an Instructor in the Office of Executive Education at Harvard University. In addition, I publish a weekly economic newsletter and podcast The Powell Perspective. I am involved in numerous community and industry groups. Specialties:An innovative investment manager with particular expertise in credit risk analysis, distressed debt recovery, and deal structure. I understand the practical application of money management in response to risk on both Wall Street and Main Street.
This entry was posted in Not Categorized and tagged , , , , , , , , , , , , , , , , , , , , . Bookmark the permalink.

Leave a Reply