September 6, 2011
I tend to see the silver lining in every cloud, and in the real estate crash the silver lining is particularly evident. Housing is affordable again – in some places extremely affordable, with mortgage payment-to-income ratios at or near record lows. If you think individual investors should start gaining an exposure to real estate again, how should they do it — through REITs, through a mortgage-backed securities (MBS) fund, through direct purchases of property? What is your general view on real estate?
I am very positive on commercial real estate because there wasn't a lot of office building construction in the last cycle. We have a very large real estate operation at Blackstone. It operates all over the world in all kinds of properties, and it is one of the strongest areas at the firm.
Hotels are very good. Offices in places such as New York, San Francisco, Washington and a few other cities are very good – not every city, but those cities and a few others.
To implement a real estate strategy, you can invest in real estate funds. You can invest in certain REITs. Mortgage-backed securities (MBS) funds are attractive. And you can buy buildings directly if you are an institutional investor and have the resources to do it. Individual investors are more limited in what they can do, because single residential properties are very undiversified and costly to manage. For individuals, I would recommend MBS funds and high-quality (Class A) office REITs.
If you don't mind the conversation taking a more speculative turn, I have been researching the effects that the end of the global population explosion will have on the very long-term future of investors. (World population is expected to peak between 2050 and 2075 and then begin to decline.) Ben Wattenberg first brought up this issue in his book Fewer. Most authors who have looked into this question are bearish on the investment markets, because they see limited growth opportunities in a world without an expanding population. My preliminary results, however, are bullish, because a very large number of previously poor people are going to be able to consume at first world and near-first world standards. What is your view on this question and how you think about it?
You are looking at it correctly. Look at China. China is trying to control its population, and their standard of living is rising.
The most important economic story in the world today is the rising standard of living in the developing world. You don't need an expanding population to have growth. You just need to be improving the quality of life for the existing population, and that is what is going on in India, China and many other places in the developing world.
What scenarios do you fear most for the economy and the markets?
There is plenty to worry about. I am very worried about a breakdown in Europe as a result of sovereign debt default or restructuring – a meltdown in the European banking system similar to the potential meltdown we had in the United States because of subprime lending. So that is my big worry in Europe.
In the United States, I am worried that we will slip back into recession because Obama will be ineffective in getting any stimulus through. Congress is trying to make him look bad, and the American people are the victims of that effort.
I'm worried about resumption of the Arab Spring. The overthrow of Mubarak and Gadhafi was based on the fact that younger people in those countries didn't have sufficient economic opportunity. Now the dictators are gone, and the opportunities haven't appeared. I'm worried that there will be a second wave of unrest, one that will destabilize the oil supply and possibly lead to much higher prices, which will put us closer to recession.
I'm worried about China. I'm worried that the banking system is fragile there, and there has been overbuilding of high-end real estate. Growth may slow there, and that is a particularly big worry because China is the engine of growth for the world.
And of course there is always worry about another terrorist attack, either in the developed or developing world. So there's plenty to worry about.
Laurence B. Siegel is the research director for the Research Foundation of CFA Institute and senior advisor at Ounavarra Capital LLC. He can be reached at .
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