IMN: Disruptive Technology Creates Challenges, Opportunities for RE Investors

The disruption of technological advances on the real estate market has created a buzz among market practitioners. Understanding how technological trends may present challenges and opportunities within the real estate investment market served as a popular discussion topic at IMN’s annual US Real Estate Opportunity and Private Fund Investing Forum held this week in Newport, Rhode Island.

“Technology tends to provide benefits to a society, and in the RE industry we are thinking about all the positives that technology brings, but there are in fact disruptive forces that technology brings,” Michael Cohen, director of advisory services at Costar Portfolio Strategy, told CIO.

For example, increased automation within manufacturing may impact jobs, which could then negatively affect demand for certain sectors within the residential real estate market. “If you are relying on manufacturing workers driving demand for class B apartments,” Cohen added, “to the extent that line of work is disrupted, that source of demand for workforce housing could potentially go away.”

Similarly, the retail real estate market has been challenged with the growing popularity of ecommerce. “Brick and mortar retailers are struggling. Retail sales are not going down, they’re just shifting toward ecommerce,” said Kevin Morgenroth, senior vice president at PIMCO, on a panel discussion. “We see a real opportunity to capitalize on the growing trend of ecommerce and specifically on next-day and same-day delivery models,” he said.

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The shift towards ecommerce gives way to opportunities within the industrial sector; in particular, the demand for distribution space and warehouse real estate assets. “Ecommerce retailers need about three times as much warehouse space as brick and mortar retailers,” added Morgenroth. “We have too many malls and not enough warehousing.”

Michael Mandel, co-founder and CEO of Compstak, agreed that the real estate retail market has been disrupted by the likes of Amazon. Amazon’s market capitalization was about $356 billion as of the end of 2016, compared to the combined market cap of Walmart, Target, Sears, Nordstrom, JCPenney, Best Buy and Kohl’s, which was $298 billion as of the year-end, according to Mandel. Further, over the past decade, the market cap has trended lower for the traditional retail outlets relative to their online counterparts.

“Across the [real estate] sector, there are huge changes and disruption taking place on the account of technology,” said Sujan Patel, co-head of Colony Northstar’s US investment management arm, on a panel discussion. “RE has been the asset class that’s been the slowest to adapt to technology. This cycle, we’ve seen a lot more innovation, and it’s only just beginning.” Currently, Colony is targeting a capital raise around a venture strategy focused on investing in early-stage technology companies.

Healthcare represents the firm’s biggest asset class, reflecting nearly $7 billion of assets. “With technology people are living longer,” Patel said. “We are big believers in healthcare overall. With the aging demographics, there has been a significant shift, [however], of people staying in their homes longer and not needing to move into these facilities.” Such facilities include senior housing and assisted living RE.

Other real estate sectors potentially impacted by changes in technology include:

The student housing sector, as online education gains popularity
Parking garages in a negative way and suburban housing market more positively, given the onset of driverless cars and transportation services such as Uber
Less demand for commercial real estate, such as office space, as innovation enables the ability to work remotely

“The negative effect [of disruptive technology] on office is probably very well documented,” said Andrew Holm a managing director at Ares Management, on a panel discussion. “Less observed is the positive impact on hotels where people gather to meet together. People get really focused on AIR BNB disrupting urban hospitality. If anything, technology has been a boon for the large group meeting space, as people spend less time face-to-face in offices they tend to get together for conferences more frequently.”

Going forward, market participants seem to keep a watchful eye on the risks and the opportunities presented by innovation. “As a firm, we are trying to get our arms around [technological changes],” said Randy Giraldo, managing director at TH Real Estate, “to capitalize on it and get ahead of the curve as opposed to being reactionary.”

Tags: IMN, Real Estate, retail

Signs of relief for the hedge fund industry continue to mount.

New hedge fund launches increased for the first time in a year during the first quarter of 2017, according to the latest findings by research firm HFR, while liquidations declined narrowly over the same time frame. Both management and incentive fees continued to edge down over the period. And despite being plagued by concerns over performance and fees, total hedge fund industry capital increased to a record $3.07 trillion in the quarter, surpassing the previous record of $3.02 trillion from the prior quarter.

“Hedge fund launches saw an uptick to begin 2017, as total industry capital extended above the $3 trillion milestone, investor risk tolerance increased, and expectations for near-term financial market volatility declined,” Kenneth J. Heinz, president of HFR, said in a statement. “The recent increase in launches and moderation in liquidations is consistent with the trend of fee structures evolving to meet institutional investor demands and requirements. It is likely these trends will remain central to industry growth for the balance of the year.”

New hedge fund launches totaled 189 in Q1, up from 153 in the prior quarter and the highest level since Q12016. Hedge fund liquidations fell to 259 in the period, down from 275 in the prior quarter. For the one-year period ending Q1 2017, 712 new funds were launched, while liquidations totaled 1,025.

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Average hedge fund management and incentive fees edged down in the quarter. The average management fee fell by 1 basis point (bp) to 1.47%. The average incentive fee fell 10 bps to 17.3%. For funds launched in Q1, the average management fee increased to 1.4%, up slightly from 1.3% for 2016 launches. The average incentive fee for funds launched in Q1 fell to 17.1%, down 30 bps from 2016 fund launches.

Approximately 30% of all hedge funds currently charge management and incentive fees equal to or greater than 2% and 20%, respectively, HFR estimates.

Performance dispersion—the difference in performance among funds—fell slightly in Q1. The top decile of hedge funds gained an average of 14.1%, while the bottom decile declined 7.0% for a dispersion of 21.1%. That represents a modest decline from 13.7% gains and -10.1 % declines—or 23.8% dispersion—inQ4 2016.. Over the trailing 12-month period ending Q1, the top decile of funds averaged a 36.5% return, while the bottom decile fell an average of 13.8%, a one-year performance dispersion of 50.3%.

Research firm eVestment, meanwhile, reported that investors allocated $10.5 billion to hedge funds in May, bringing YTD totals up to $23.3 billion in its latest performance and asset flow data. The allocations come on the heels of seven consecutive months of positive performance for hedge funds, which are now up 3.2% YTD as of May.

The inflows for the year follow a harsh 2016 that saw more than $100 billion in outflows, according to eVestment. The fourth quarter of 2016 saw the largest quarterly outflow from the industry since Q1 2009, during the financial crisis, in a sign of mounting investor frustration.

But hedge funds still trail the benchmark S&P 500 index, which ended May with gains of 8.5%. And the rise in fund formations amid signs of renewed investor interest may hamper returns for the industry. An overcrowded industry with too many firms pursuing similar trading strategies and arbitraging away each other’s returns has been a chief concern among hedge fund investors.

A rise in funds and decline in liquidations among sparks of investor interest could forestall the much-needed culling investors often say is needed.

Tags: eVestment, Hedge Funds, HFR, inflows, redemptions