When on a consulting assignment a few years ago in Miami, I saw firsthand how Brazilians and Argentinians fleeing eminent currency devaluations in their countries bought condos and commercial buildings in Miami at a dizzying pace to preserve capital. Their efforts changed the skyline of that city, and have kept Miami’s economy humming.  

And now Chinese investors’ growing appetite for U.S. real estate is more confirmation of how the asset is a major opportunity for wealth preservation and income—and why if you’re not already investing in our Global Income Edge REIT portfolio, you should consider it. We’ll be review our holdings in depth in the next issue of GIE, due to be released Dec. 14.

Chinese buyers spent $28.6 billion on American homes in the year ended in March, more than double their purchases two years before, according to the National Association of Realtors. And Chinese purchases in overseas commercial real estate jumped 49% last year, according to real estate brokerage Jones Lang LaSalle.

U.S. real estate seems to be sopping up more than its share of money from China, much of which is searching for a new home since the collapse of the Chinese stock markets. Reportedly more than $590 billion has moved out of China since last summer.

Though Chinese buyers are responsible for a small part of overall sales, we believe this shows a major global push into the U.S. real estate market that will only grow stronger. 

U.S. investors should take notice before an income opportunity in their backyard passes them by. Global investors’ flight to safety has caused the dollar to strengthen, yields on government securities around the world to collapse, and inevitably U.S. real estate valuations will be pushed up. 

Time to Buy

REITs have many factors going for them. To start, they’ve been extremely oversold in the last few weeks and months on Fed rate fears, even as many of these REIT firms have continued to post good earnings.

Real estate investment manager Cohen & Steers said recently that U.S. REIT valuations are at attractive levels, and specifically “REIT prices are near the middle of the four-year range relative to cash flows.” Cohen & Steers also noted that the stock market, by comparison, is at high levels. The investment managers conclude as we do: “We believe this represents a compelling opportunity for REIT investors”.

And given many REITs now trade at a discount to their net asset value (NAV), many may be taken private by private equity firms. But in the coming months there may be stepped up competition for these investments beyond private equity firms and Chinese buyers.

We have long thought that REITs would be the beneficiaries of investors fleeing high yield bond markets that are collapsing due to defaults as a result of the collapse in commodity markets.

Another reason that REITs would be compelling as a source of wealth preservation is that they typically trade independently from stock markets that could be affected by the impending rate increases. And big investment banks such as Goldman Sachs are already advising equity investors to moderate their expectations for stocks in the coming years.

Finally, the expected increase in European stimulus is also a positive for REITs. That stimulus will further depress yields in the European region and spur demand for income investments such as REITs in the U.S. and elsewhere. 

Portfolio Update

Though on balance hedge funds have had mixed results in the last few years, the recent news that some of the top ones have taken stakes in Global Income Edge Aggressive Holding PDL Biopharma (NYSE: PDLI) drew our attention. In August we put the firm on Hold due to a significant weakening in the valuation.

In late November, according to a report by hedge fund tracker Insider Monkey; At the end of the third quarter 20 of the hedge funds it tracks were long PDL, up 43% from the second quarter.

We have long believed that patent company PDLI’s approach to bio tech, which invested almost $1 billion in a number of promising technologies, offered more risk diversification and chance of success than biotech firms that place all their bets on one technology.

Clearly, the rout in biotech has not helped the firm’s valuation, nor has the fact that many of its patents are expiring.

In fact, due to its poor performance, we have been thinking about dropping the stock from the portfolio. But given the so-called “smart money” has doubled down, we believe this development warrants keeping PDLI in the portfolio for a few more months as a Hold to see if there is significant improvement.