It has become evident that we are in for a very long slog no matter who is president and that there will be more shocks to the world economy for possibly several more years. Europe is nowhere near solving its problems and it now seems they are willing to kick the can further to avoid the real pain, and just let Draghi save the day for the politicians with his bond buying program. It could easily be 5 to 10 more years until Europe is really back on a sustainable growth track, and even then the monetization of the problems at the ECB will be very hard to unwind in an orderly way.
China has been having more trouble hiding the substantial problems hidden away in its banks. Not only do they hold many underwater real estate loans, but it now turns out that a substantial number of loans to borrowers in the commodities business may be fraudulent. On several occasions recently, banks went to seize the collateral on defaulted loans only to find the warehouses empty or not even existing. With the world economy in deep trouble it is clear the export driven Chinese economy will have much slower growth over the next several years, and without exports it raises question as to how much wealth increase there may be to drive the domestic economy. Many Chinese entrepreneurs and even political managers are seeking to get out or at least get their capital out. The major political, social, environmental and lack of freedom issues are taking their toll, and could lead to internal problems in several years. There is also the rapidly growing confrontation with Japan which could get ugly, and the confrontation over oil and other raw materials with the southeast Asian nations. China has always believed any threat to its nearby territory is a war like threat, and there is no way to know how all of this will get resolved. China is no longer the rapidly growing power it had been, and various tensions are likely to increase over the next several years. That will mean more and more capital outflow and it may come here for investment.
India has huge problems and they are not getting any better. The level of corruption and red tape in India is now badly hampering its potential for growth, and that is not going to change much in the next few years. India essentially blew it because of the corrupt political system. Someday there will be either a revolution or some other event to try to change that, but it is not something any of us need to concern ourselves about now.
It is clear the Fed has stated with its pocket book that the US is in serious trouble and it will be several years before things really get a lot better. At least 2015 and probably longer. The combination of the capital markets crash and the bad policies of Obama which have held back the recovery, combined with the out of control deficit, means we have years more to a real recovery no matter who is president. Unless Romney wins and the entire Congress is controlled by the Republicans so that there is an end for awhile to gridlock, then the hard decisions will not get dealt with.
So all of this is likely good for US based real estate. Capital will continue to flee here from Asia and Europe. Anyone who understands monetary policy and economics knows that we are just setting the table for bad inflation in 3-5 years with the massive monetary and fiscal stimulus. There is no way the economy can suck up all of this monetization on top of all of the excess private capital sitting on the sidelines in corporations and with individuals. Bonds will eventually get killed. That has to happen. The control of the stock market by high speed computers, and the continuing scandals like MF Global, Perigrine and others, just causes investors to look for other investments. Commodities are risky for many. Gold is nice but is limited in dollar capacity. Emerging markets are probably good but the issues of all that I mentioned above will continue to cause those countries to be subject to currency issues and political issues brought about by the struggling world economy.
Back to US real estate. It is likely to continue over the long run to be the place to be for many investors. It becomes where else to go, as opposed to anything else. As I have said in the past, if you can find good real estate, even if it is not at the absolute best distressed price, lock in 3% debt, and hold, you will do very well and you will ride out the volatile world we are in with war in the middles east, collapse of currencies, and who knows what other black swans. Buy good assets at reasonable prices, leverage it reasonably at these historic low rates, and you will succeed.
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Joel Ross
Joel Ross began his career in Wall St as an investment banker in 1965, handling corporate advisory matters for a variety of clients. During the seventies he was CEO of North American operations for a UK based conglomerate, and sat on the parent company board. In 1981, he began his own firm handling leveraged buyouts, investment banking and real estate financing. In 1984 Ross began providing investment banking services and arranging financing for real estate transactions with his own firm, Ross Properties, Inc. In 1993 Ross and a partner, Lexington Mortgage, created the first Wall St hotel CMBS program in conjunction with Nomura. They went on to develop a similar CMBS program for another major Wall St investment bank and for five leading hotel companies. Lexington, in partnership with Mr. Ross established a hotel mortgage bank table funded by an investment bank, and making all CMBS hotel loans on their behalf. In 1999 he formed Citadel Realty Advisors as a successor to Ross Properties Corp., focusing on real estate investment banking in the US, UK and Paris. He has closed over $3.0 billion of financings for office, hotel, retail, land and multifamily projects. Ross is also a founder of Market Street Investors, a brownfield land development company, and has been involved in the acquisition of notes on defaulted loans and various REO assets in conjunction with several major investors. Ross was an adjunct professor in the graduate program at the NYU Hotel School. He is a member of Urban Land Institute and was a member of the leadership of his ULI council. In 1999, he conceived and co-authored with PricewaterhouseCoopers, the Hotel Mortgage Performance Report, a major study of hotel mortgage default rates.
