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A Frank Discussion With Two Real Estate Pros
On Tuesday, I went for lunch with Frédéric Blondeau and Benoit Caron of Gestion de Placements Eterna,
a Quebec trust company founded by Alphonse Tardif in 1928 and
successfully managed by three generations of the Tardif family. The
company is now run by his grandson, Paul Tardif.
Frédéric
contacted me, telling me he and Benoit are fans of my blog. I was more
than happy to meet them and talk about markets, pensions, the Quebec SARA Fund, Quebec's financial community, global REITS and commercial and residential real estate.
Let
me first say these are two standup individuals, the type of people who
renew my faith in real estate investment professionals. I say this
because apart from a handful of people I've met in the past in
institutional real estate, most of the investment professionals in this
asset class are slimy, sleazy, unethical, arrogant, ruthless sharks who
only care about their pockets (true of most individuals in finance but
particularly true of real estate guys and gals). And I mentioned this to
them because most of the "shady characters" I know are now working
together in Montreal for a well known private equity fund (that's
another scandal!).
Frédéric and Benoit struck me as highly
professional, highly ethical and extremely sharp individuals. The fact
that they chose to work at Eterna tells me a lot too because this firm
has a stellar reputation in Quebec. They both have extensive experience
on the buy and sell side. Frédéric was a founding member of Presima, the Caisse's real estate division that was sold to the National Australia Bank. Interestingly, the Caisse never disclosed the terms of the deal and how much they received for the sale of this division, but I will closely examine Presima and Otéra Capital,
the Caisse's real estate debt subsidiary, in a future comment. Too many
individuals have asked me to look into these operations and I promised
them that I will look at all public records.
Benoit Caron worked as an analyst at Montrusco Bolton, Canaccord Genuity
where he ranked high on the Brendan Woods survey, and then moved to
the National Bank Financial as a VP, Fundamental Research on
Infrastructure and Engineering. We spoke about the sell-side and the
"constant pressure of being bullish on markets." I worked as an
economist at the National Bank Financial back in 2000-2002 and remember
the bear market following the tech meltdown. I was the assistant to
Clément Gignac, the Chief Economist then who is now Quebec's Minister of Economic Development, Innovation and Export Trade.
Never forgot what Clément told me: "In a bear market, investors
rediscover the value of economists." So true, which is why along with
Stéfane Marion, Vincent Lépine and Martin Roberge who was the Chief
Strategist at the time, we garnered most of the soft dollars during that
recession.
Frédéric and Benoit told me that they've been reading
my comments on seeding Quebec hedge funds and they're in full agreement
with many of my opinions. As I told them: "Look , the Caisse screwed up
and they invited me into their offices to 'set me straight'. I may have
been too harsh in my criticism of the SARA Fund, but the truth is there
is hardly any seeding going on. All I see is René Perreault and his rich
buddies getting richer. It's a big club, the Quebec club."
I
added: "I got nothing personal against Jean-Guy Desjardins. The man in
an entrepreneur, made more than a few people multi-millionaires,
including a former boss of mine. I give him credit, unlike many powerful
Quebecers who just talk the talk, Jean-Guy Desjardins walks the walk
and he delivered on his promises. But what really frustrates me is how
political this file has become. It's simple, if done properly, everyone wins by seeding Quebec hedge funds,
including depositors, Quebec's financial community and the thousands of
university students studying finance who end up leaving for Toronto or
New York because there are no jobs for them here. And what really makes
me angry is that we've wasted billions in failed venture capital
programs and call 'seeding hedge funds' too risky when the opposite is
actually true."
I really hit my point when I said: "There is a petty, jealous behavior in
Quebec. Quebecers say they're proud but they don't support their own
talent, forcing many of their brightest to leave. It's disgusting and
really not necessary. We have amazing talent in this province which
Quebec's institutions don't want to promote and see succeed. That's what
Ontario Teachers' did in Ontario and that's exactly what we should be
doing here."
Frédéric and Benoit agreed it's difficult to raise money in the current
context but they added "no doors are closed, it's just that people want
to see us perform a bit before trusting us with their savings." They got
an important mandate from SSQ
which is public and a few others that are not public. They specialize
in global REITS, an extremely liquid market. They're looking to start a
hedge fund on global REITS but are proceeding cautiously, taking their
time to set up the back and mid office properly, wanting to show
institutions that they are ready for the institutional setup. I
commended them on this approach and think it speaks volumes on their
professionalism and integrity. They're not willing to cut corners and in
a rush to raise assets until they are ready to properly handle the
inflow on the operational and risk management side. Others do not have
the luxury of having Eterna's support staff backing them and are
scrounging to get by.
We ended with a frank discussion on the real estate market. Benoit told
me that he sees the slump in US residential real estate continuing
because too many mortgages are still under water. He told me that the
spread between existing home prices and new home prices
is at a historic low where it's more attractive to buy an existing
home. Moreover, "with youth unemployment at historic highs" many new
home entrants can't afford to buy houses. All this bodes well for rental
units, especially apartment buildings.
We both agreed that fiscal tightening pretty much ensures more quantitative easing by the Fed, which will be a boon for Wall Street
but not for Main Street. As I told him: "There is simply no choice for
the Fed but to counteract any fiscal tightening that comes from the debt
deal." He told me he sees the ECRI indicator "rolling over," which doesn't bode well for global growth.
Finally, and most interesting, Frédéric and Benoit agreed with me that the Canada bubble will burst and that Canada's mortgage monster
stands to lose billions and is in a very tenable position. According
to Benoit: "Too many people are way over-leveraged, are mortgaged to
the hilt buying houses they can't afford, and they risk getting
killed when they lose their job or if rates rise. If
we suffer a slowdown that is just 20% of the US slump, we're in big
trouble. It's simply not true that real estate prices won't get hit in
Canada; this isn't the 1970s, and people are in for a shock in the
coming decade."
I found the whole conversation fascinating. I told them when I wrote my comment on post-deleveraging blues in March 2009,
I totally (and erroneously) ignored REITs because I didn't know enough
about the market and honestly thought REITs were cooked. They turned out
to be among the best performers since. I leave you with a Yahoo Daily
Ticker interview with Gary Shilling, the deflation king, who sees
another 20% drop in housing to cause recession in 2012.
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Peddling fiat on ZH? What frank discussion?
Worse article ever!
That's our dear little leo!
He monopolizes the "worse to worst" end of the ZeroHedge spectrum.
"most of the investment professionals in this asset class are slimy, sleazy, unethical, arrogant, ruthless sharks who only care about their pockets"
Ironic - sounds like something akak would say about you, Leo.
Sorry, just pointing it out! :)
-FN
Thank you, Leo. I find just the little bit of background about the different players quite interesting.
Sorry Hayek
Any "Institution" or "Pro" that has directly or indirectly received benefit from the Feds glorious monetizing program deserves to have his fortune wiped off the face of planet earth.
Just saying....
This is what you call a "frank discussion"? Am I missing something? Where are the insights? That the Canadian housing market is going to burst? What are the practices that Frederic and Benoit believe created the problem? Have those practices changed? Will Frederic and Benoit be shorting institutions and instruments related to the housing market in Canada like Paulson did here? Should Canadian citizens have their retirement money seeded to these guys so they can seed their own demise? What does "properly handle the inflow and risk management side" mean? Were these kind of questions too frank for you to ask?
There will be great opportunities in real estate after the War---just as there was after WWII. Problem is surviving yet unknown War whether it be civil, revolutionary, economic, idiological, class, territorial or energy War. Take your pick, but keep your head low and start digging a trench.
...the epigram is actually: "what's sauce for the goose is sauce for the gander".
Great article Leo - appreciate your lucid view on stuff especially relating to Montreal/QC
Just a quick addendum regarding Canada's 'mortgage monster' - i dont believe the effect on a possible bubble bursting in RE will be anywhere near as strong in rental properties. If anything, by the logic of S/D, rental props should do very well considering people won't be buying homes, and due to the inevitable glut of supply in condos (i havent seen anything BUT a condo being built whether its DT, north/south shores) this should further bring in extra demand to apartments. Again, assuming such a bubble will happen.
Demographically however, look at the prices and pop out West, and then T.O. When prices become unsustainable, i think QC might experience a sudden influx of Westerners as well. The French thing isnt for everyone, but (thankfully) with sovereignety off the table, i think overall the province is in a much better position than in the dreadful Bouchard, Pariseau years.
It will be much like the USA. The newer high end RE that was, built and sold as investment, will be down flip after the courts do there work. The rush will be to find a tenet that pays the mortgage. This will lead to still more down flipping (short selling) of RE. How far will it go? The answer is, "jobs". Until we see the real bottom, stay out of the water.
A glut in condo supply would result in a glut of condos for rent. So why do you think that, magically, that rents are going to go up on "appartments"?
One thing you might see (and this is sort of happening in the US) along the lines of your theory is that smaller units end up renting at a larger price per square foot premium compared to larger units. But overall rents should decline.
This is region specific no doubt, but most condos in the region im familiar with are bought and sold whereas apartment bldgs are purely for rental purposes (and then of course flipped and sold). Hence the S/D paradigm should work just fine, assuming you subscribe to that school of thought.
Yes at smaller units increasing in price, but if youre comparing on a sq foot basis (which is how you compare individual aps, and then cap ratio for the whole property) this should hold for larlger sizes as well. Although i have seen a statistic in the last year that 2bedrooms and studios increased in px more than 3bedrooms+, so i get where youre coming from.
No discussion of real estate is complete without links to mortgage FRAUD, the catalyst of the current crisis.
Real Estate has become FRAUD because no one really owns their home or has a right to their property anymore.
The mortgage racket is little different than health-care, other "insurance", and the "company store" that sold necessities to miners and other workers marked up 90% over retail.
FRAUD.
I agree with your friends assessment that real estate has to go down by 20%, reason being no gainful employment for millions upon millions in North America.
And, of course REITS didn't go down, they were propped up with TRILLIONS of taxpayer debt along with the banks and markets.
I like you dude. But at this stage of the game I think it's time to go with a quote from Jimmy Baldwin:
You think your pain and heatbreak are unprecedented in the history of the world. But then you read. It was books that taught me the that the things that tormented me the most were the very things that connected me with all the people who were alive, or who had ever been alive.
Thanks.
I didn't junk you.
Oh I feel very connected, and fortunate, but duty bound to tear it down at the same time.
Stop posting the s*it Oba lie about return to a recession in 2012. We never left the recession.
Leo, I am torn on the seeding hedge fund issue. My mind keeps going back to the California debacle and all of the pay to play scams that were uncovered in the state pension/hedge fund relationships. I imagine that the greed that is always present in Wall Street will make similar arrangements in other locations. The higher average returns would be nice though. Your thoughts on this?
Side note for your editing pleasure: the last paragraph repeats the same 4 sentences twice.
defender, thx, I edited that. Seeding hedge funds via managed account platforms is the way to go. Contact me at LKolivakis@gmail.com for more info. Thx
here we go again..
you can not get a high ratio mortgage in canada without CMHC insurance. CMHC has very well defined guidelines on (borrower) income-payment ratios. there were no NINJA loans in canada.
there is no downturn in the real estate market in vancouver. here is the vancouver real estate board market video update for june2011.
http://www.youtube.com/watch?v=5Z3rAxw3I5E
your french friends were not speaking for all of canada.
For those of you who are tired of hearsay and conjecture and are looking for half-decent analysis on the Canadian real estate market, check this out:
http://www.theeconomicanalyst.com/
Incidently, I'll junk anyone who ever tries to tell me everything is alright becuase the "x" Real Estate Board told them so. Ever heard of selling your book, Jack?
Cheers,
-FN
Being short canadian RE is perfect hedge for all the gold holders here. Think about it.
And thanks for link. Australia offers similar bubble/hedge. It is humorous to see Australians and Canadians all explaining why their RE bubble is "different". We never do F'n learn.
So how do you short Canadian real estate?
Don't go there; or invest in Florida.
Ask 'da boyz at Goldman' to create a synthetic CDS on CMHC bonds. For a nice fat fee, those guys will find a way to accommodate you. -:)
CMHC bonds have the same credit-worthiness as the Government of Canada, so a short on GoC bonds, and, essentially, the Canadian dollar, would accomplish the same thing.
The question is, "what to short the CAD$ against", since other currencies are just as shitty. I'd suggest Canadian bank stocks are going to do quite well going forward. Canada does have some excellent gold mining companies as well that are trading at almost unheard of low multiples (ie: ABX at 10X earnings).
So how do you short Canadian real estate?
Sell commodities... that is all canada has...
So how do you short Canadian real estate?
Sooner or later, this entire "something for nothing" mentality has to end. People are going to have to come to the conclusion that they actually have to work to live.
Sooner the better.
The biggest under publicized problem sector is commercial (retail and office); industrial is holding its own, but just barely.
Every underwater loan is being rolled over; continuous mark to myth waiting for the illusional recovery. The SHTF in Q1 2012.
Shhhh...the hookah smokers might hear you...must...maintain...illusion...
Just look at the financing behind Canadian RE -- nearly all adjustable rate, short-term debt, with massive roll-over risk. Would *you* buy a stock if you knew that nearly all of its owners had bought it with margin accounts with the minimum amount of equity possible?
Canadian RE down 60-70% easily, and the CMHC is gonna end up eating much of their portfolio in losses. The outcome could be quite epic.
LOL. Down 60-70%%?
I love how you try and extend the Vancouver market to the rest of Canada.
What do you not understand about VANCOUVER=/=CANADA and that the population is far too small in the country to create such a downfall.
The rest of Canada uses a similar financing structure and is financed by the same institutions, but obviously Vancouver is the most vulnerable.
I don't know why I keep sifting through these mindlessly statist and banality-ridden piles of crap from Captain Obvious (when he isn't wearing the torn and stained cape of Captain Clueless) expecting to find even a single kernel of wisdom or insight.
akak - every fracking leo thread ,there you are whinging... its dull.
i feel the same about that Cog Diss guy - to me he's a pseudo-intellectual old git with verbal diaarrhea on ZH for his own ego trip - trying to milk comments like 'oh CD you are such a fucking poet man'.... n'shit.
So i don't read him any more.
Try it with Leo bud.
Every vapid, narcissistic statist rant of leo's is just another waste of space that could be filled by somebody with insight or useful information or meaningful revelations. I don't think it is asking too much for Tyler to dump the token Keynesian idiot from this website --- the world is filled with more than enough of them already.
And just for the record, what's good for the goose is good for the gander --- if you dislike my comments to and about leo, then skip or ignore them, just as you ask me to do with leo. But "just ignore it" is exactly what has gotten us and our societies into the mess we find ourselves in today, isn't it? Which is why I refuse to do it, and which is why I am going to continue pointing out the dishonesty, irrationality, and statist perversity of every one of leo's posts. So get used to it.
'what's good for the goose is good for the gander'
heheheh - i like that.
See?
i can appreciate your prose when it ain't so vitriolic - but yeah fuck it - leo's an adult - he can cope.
i just wanted to make my feelings clear on CD.
I actually wasn't aware of his Keynesianism. Dont agree with it if thats the case - though i suppose i would skip those articles over. As should you. This one is very good, and has nothing to do with Keynesianism.
fuck off
+++
Lighten up. The Schilling piece was worthwhile.
I was talking to the branch manager of one of the big three banks last month. He senses folks at the corporate level are starting to get concerned.
Statism. Expect it and respect it.
Good article Leo. There are going to be some fantastic opportunities in real estate over the next decade.
Seek and you shall find spacemonkeys!
fantastic opportunities in real estate? so you think you can buy low and sell high? is that it? who will buy it? who will finance it? do you understand what is about to happen? my friends, the world that is coming is almost here at the door. this world is not like anything we north americans have ever seen. i hope you all understand this. not only all of that but just think about it. we cannot ever really own anything. so tax hungry cities will be looking for someone to help them out. you put your name on the dotted land on some investment property without the benefit of homestead exemption and its katy bar the door. no sir, i shall not worry about real estate, ever again. it is much easier to just sit and watch the gold and silver bull.........just think about it. during the gold and silver bull, anyone can do their own investment advising and it won't cost you a thing and all of the paper clowns running around advising will be mowing the metal head yards very soon. that is if they live.......
HPD, I concur that it probably isn't going to be an easy task to find anyone to sell a property to, but its a great time if one can purchase and lease. It doesn't take too much effort to see that the rental markets are doing great in most metropolitan areas...so long as you can find tenants that are employed! San Diego, CA and Chicago Il, perhaps?
I live in Ontario. There will be a burst, but I'm not sure it will be like the states. There are no hair dressers here that own 19 houses. Trust me. Its not easy getting a mortgage for over $250K. No NINJA loans here.
www.silvergoldsilver.blogspot.com
I too am an Ontarian, and I really do hope you were being sarcastic.
I can go borrow 5% of the value of a home from my parents to make a down payment, go to the bank and secure a 7% cash back mortgage, pay back my folks the loan they gave me and be 102% leveraged.
I probably have 10 close friends who earn within $15k of the 2009 Ontario median household income ($69k... so between $54k to $84k). 3 of those 10 friends own multiple residences, and I am somewhat certain they're highly leveraged assets.
Let this be a warning - Canadian NINJAs are crafty. They hide in plain sight.
I bet Chuck Norris could get a loan...