A Frank Discussion With Two Real Estate Pros

Via Pension Pulse.

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.

Comments

[High Plains Drifter]

i remember watching a lecture given by a economics professor ( i believe ) at one of the branch schools of university of california. he is on youtube. i will have to see if i can find it. interesting lecture . he used to come on cnbc but it has been years since he was on there. i think they might have thought he was too real. but he talked he did a exhaustive study on real estate going all the way back to the 1600's i think. he said that the average ROI on real estate was always about .1 percent.   .1 percent?????  in  the Bible  when God talked  about  wealth,  He  talked about  wives , children,  arable lands, cows , sheep, goats,  oxen,  gold and silver, etc.  Why would you think that the Maker of all things, would think such things?  If you examine His thinking on such issues, one might construe that He was helping mankind because what that type of wealth did was make a man independent and not needing to rely on others for anything. We in this country were like that one time. But the liars told the children to leave the farm and go to the cities where you can really learn to see what life is really all about. yeh sure...... what is wealth to us nowadays?  Stocks, bonds, houses, etc. I think we have lost our way about what is real wealth.

[starfish]

HPD, check the article in World Net Daily June 2011. "God and your Money".

It describes the historical battle over money.

God's Money. Gold, Silver, Land and Livestock.

Man's Money is a derivative of the system originated in Babylon with dual entry accounting and evolved into fractional reserve fiat.

Truly this is an ancient war.

[A.W.E.S.O.M.-O 4000]

Sorry High Plains Drifter. I had to junk you. But that is only because I am a gay commie athiest. Nothing personal.

[Yen Cross]

  Real wealth, Is   1) Health

                          2) Knowledge

                          3) Location

                          4) Resources

[piceridu]

YC - right on the money wealth.