Adjusting Your Career Within a Teetering Economy

January 25, 2008 – Toronto, Canada

Forbes Rutherford has provided specialized HR consulting and Executive Search services to both national and international property and investment firms for the past twenty-five years. Having dealt with a broad cross section of the industry’s senior executives and rising stars, Mr. Rutherford is in a unique position to observe the changing macro trends and oncoming challenges facing the Canadian and International real estate community. Additional information on Mr. Rutherford’s background may be viewed at the following web links: www.rutherfordinternational.com or http://www.linkedin.com/in/rutherfordintl or https://www.xing.com/profile/Forbes_Rutherford

Topic: Adjusting Your Career Within A Teetering Economy
We’ve been a keen observer of the real estate industry for twenty-five years and have experienced more than one industry cycle. The bursting of the United State’s housing credit bubble, is the result of pumping an industry with super-easy financing and profligate lending, which is reminiscent of the commercial real estate meltdown in the early 90’s. Clearly we are entering a chaotic economic period, with the reverberations seemingly chasing the time zones.

American mortgage lenders have exercised the same undisciplined penchant for writing ‘no’ or ‘little’ documentation mortgage loans in the residential industry as they did in previous decades with commercial lending. We believed then that an underlying driver was “personal performance compensation” run amok; and we believe a contributing driver for the sub-prime debacle today is rapacious personal enrichment without appropriate safe guards. Poor short-term compensation architecture that rewards fatuous results serves neither customer nor shareholder in a meaningful way but allows management to calculate bonuses against phantom value creation.
The spillover effect on other sectors of the economy including the commercial real estate industry is likely to be dictated by the degree of optimism the American consumer has in his or her future. Clearly the Federal Reserves aggressive rate cut and an effective fiscal stimulus during the election year run up may give stocks and optimism a shot in the arm however it needs to be implemented quickly as housing is a $23 trillion asset class that is in an aggressive deflationary mode. The supply of intended homes for owners has reached a level of vacancy which surpasses all records since 1956. Business Week reports that the supply of unsold homes will carve an average of 10 percent out of home values over the balance of this year. Match this reduction in consumer asset wealth against current household financial obligations relative to their disposable income, which is just shy of 20 percent and one would conclude that the American consumer is walking a high wire.
What is one to do with respect to managing their career in an economy that is teetering weighted by a general morass of insecurity?

Check this article periodically for revisions, as my thoughts will unfold once we’re able to gauge the market’s direction. In short however – if you tend to be conservative and adverse to risk - it makes sense to me that you consider companies with a strong balance sheets and a tenant mix within its portfolio that is relatively insulated from the angst of the American and Canadian consumer. Ownership positions meltdown but assets remain and require management; tenants’ contract and shift to lower cost facilities but need modern amenities; vacancy needs to be filled – asset value erosion mitigated. Seek property owners and managers with portfolios that are well located and occupied by commercial and retail tenants that have solid, ongoing businesses and are well situated within commercial, retail and transportation nodes. In a global economy, real estate is local however the investment in commercial and infrastructure assets is international – employers with good diversification offer greater peace of mind.

If like me, you see opportunity in unsettled times – you elevate your game, stay informed, widen your network; and most importantly, you learn to recognize business opportunities, which always albeit briefly reveal themselves within the cracks of chaotic systems.

Forbes J. Rutherford, PresidentRutherford International, January 25, 2008

Globalization - An Overview of International Real Estate Markets

Originally Published by REmatrix.com in June 5, 2007 – Toronto, Canada

Topic: Globalization – An Overview of International Real Estate Markets 

 

REmatrix.com www.rematrix.com
Would you comment on some of the trends or underlying dynamics of the countries with which you’re familiar?

 

Forbes Rutherford
Let’s refer to some of the countries, whose expatriates’ make up part of the Diaspora of North American’s citizenry and could easily be aggregated into private equity pools aimed at investing in their native land assuming of course that the risk is manageable.

 

Consider:
 

India –
Prior to 2005 banks and pension fund ownership rights were severely limited, acquisitions were completed as “all cash deals” and primarily by the “end user.”

 

Post 2005, with changes in government policy on credit and expatriate investment, a highly educated population with a relatively stable democracy has shaken lose its artificial constraints and become a global powerhouse. Major financial players have set up in India, the mortgage market is expanding, and the Middle Class is growing. This has had a direct effect on retail development. Over 300 malls will have been built by 2008. Retail expansion and housing starts is not the underpinning of a healthy economy but rather its measure. India has poured money into energy production and distribution infrastructure to support its growing manufacturing and knowledge based industries. It’s a frenetic market that adheres to business rules that are familiar to North Americans.

 

China –
A politburo with unfettered mercantile tendencies that has little regard for collective safety let alone individual rights to life, liberty and property (real or intellectual.) The political elite are trying to reconcile the consumerist demands of an austere and rapidly growing middle class within the confines of a giant agrarian serfdom that has only begun to rebel against government sanctioned Dickensian themed workhouses.

 

China sells products and makes strategic off-shore investments in raw commodities with client companies. Its trade imbalance and associated risk with these client countries is akin to “Godzilla” walking a tightrope. It excavates client country’s mineral and energy wealth through ersatz corporations and stamps its political feet if it doesn’t get its way. Free markets and mercantilism can not co-exist and in time will rupture; in the meantime however Western societies will hold their collective noses because…”well Jiminy Cricket, you can’t beat the price!” Wal-Mart will be building 400 stores over 10 years. Commercial and retail structures are built on top of land leased by the government for seventy years. There is nothing “free” about trade activity with China; Western consumers have traded their country’s manufacturing sovereignty by supporting predation.

 

With seventy year land leases, there are at least three generations of real estate careers, which will provide all manner of real estate and construction services to the Chinese economy. However I can’t help but remember the recent and very public trashing of corporate offices by miner families when they learned about the unnecessary death of over a hundred miners and fathers. No pun intended, but I believe the anger and anguish by these families is simply the Canary in the shaft as it foretells a growing anger within the economically disenfranchised Chinese masses.

 

As Japan and Saudi Arabia have done and continue to do, China needs to ship money out of the country to offset trade imbalances. Real estate is a convenient place to park capital offshore, but I wouldn’t bet the farm on China’s ability to sustain its growth without serious social and economic upheaval. You can tell I’m not a big fan of communist tainted mercantilism masquerading as a free market capitalist society.

 

Russia –
The concept of “capital preservation” takes on a whole new meaning when hiring a body guard is part of your business expense while traveling there. Doing business requires sophisticated and connected associates that can guide you through the three separate and not necessarily equal economies in Russia. The first two are hidden and weld great influence – the Kremlin and the Military. The third is the Public economy and is what we read about in the daily press. Within this framework, the country is undergoing a clash of competing ideologies - reform versus reactionary; and the people that are outside the hidden economies vacillate between embracing the vagaries of reform and returning to a time of collectivist entitlements.

 

Czech Republic –
The Czech Republic is an interesting contrast to the Russian Republic. They’re introducing the right mechanisms for practicing real estate. They’ve amended corporate structures to include limited liability and joint stock companies. They’ve introduced a variety of debt instruments; and most importantly for landlord security – lease provisions that are enforceable.

 

Spain –
The Spanish worker is one of Europe’s most productive; interest rates are low and the country has become an attractive place to do business. These factors may undergo some friction if the Euro-Government enforces Pan-European rules as a means of protecting old Europe at the expense of new Union members that are rapidly growing within the Euro trading block.

 

Turkey –
It sits on the margins of the European Union looking in wanting to be embraced like a jilted lover. Much like the Czech Republic, it’s introduced westernized debt and mortgage instruments; and provides for limited liability and joint stock companies. There are opportunities to be had in Turkey, for instance – not one enclosed mall exists in Turkey.

 

Mexico –
With sixty percent of its population under the age of thirty, Mexico will not be slipping into zero population growth anytime soon; unlike Europe, Japan or Canada, which are already there. It has a growing middle class; and is currently suffering a five million unit housing shortage. It’s the third member of NAFTA, one of the world’s largest trading blocks – need I say more about its potential.

 

Japan –
Japan’s international forays into real estate and real estate debt were not kind to it, however it’s working its way through and appears to be moving forward. Its population is aging rapidly and has entered the red zone of zero population growth. This might explain why Japanese REIT capitalization is expected to treble over the near to medium term as investment yield becomes critical to the aging unit holder.