Capital Flight Patterns Shift as New Decade Emerges

Posted on 06/29/2020


Many pensions and sovereign wealth funds are breathing a sigh of relief, temporarily at least, that real estate prices haven’t fluctuated as wildly as stock indices this year. Funds typically own commercial and residential real estate in their portfolios and through their private equity partnerships. In only ten years, Norges Bank Investment Management accumulated US$ 28 billion in unlisted real estate and an office staff of 139 to manage the deals. There are now plans to scale back on purchasing. Interest in real estate still runs high, though, with Singapore’s Temasek Holdings announcing a venture in June 2020 with KKR to take a US$ 650 million minority stake in Vietnam’s developer Vinhomes. How does the real estate market look as we head into the second half of 2020?

Real estate activity is down, with some residential agents closing their offices and requesting assistance. Landlords are reeling from a rent strike occurring throughout the U.S. Various companies are planning to work remotely into the foreseeable future, which could put a damper on office rentals. Groups are not allowed to congregate and this will further slow a widespread return to office life. Unemployment in the U.S. is expected to hit 20%, and the month of May had the worst drop in home purchases in the last 40 years. Yet, prices are slow to absorb the news. The mystery has baffled real estate observers.

New research out of Wharton says the reason is capital flight. As was the case with hot money, which fled to the U.S. from emerging markets during the early days of the coronavirus, savings from China rushed to find a home in the U.S. real estate market. This phenomenon is not strictly limited to the U.S. The rises in housing prices in cities such as Vancouver, Toronto, Sydney, and Melbourne have been significantly influenced by Chinese buying. In the U.S., the Seattle area alone has 45,000 residents who were born in China to help hold real estate together. California, New York, Florida, and Texas are also popular destinations. However, Chinese buyers have not been interested in purchasing outside of major cities or tourist areas, which would seem to indicate a bifurcated housing market ahead, except that more Americans are expressing interest in outlying areas as they flee the cities and possible infection.

Capital Flight

Capital flight has a long and varied history in the U.S. Former U.S. presidential candidate and founder of Electronic Data Systems (EDS), Ross Perot, warned of a “giant sucking sound” of jobs headed south of the border in 1992 due to the North American Free Trade Agreement (NAFTA). The deal was later ridiculed by longstanding sketch comedy show Saturday Night Live. Perot said that the jobs would cause wealth to rise in Mexico and fall in America. Leveling the two out would create an equal wage but at that point, Perot added, “you’ve wrecked the country with these kinds of deals.”

In 2020, President Trump announced a “historic win” with the United States-Mexico-Canada Agreement (USMCA). The White House said the “terrible NAFTA agreement” would be replaced with a “fairer and more reciprocal trade for the American people.” Up to 600,000 jobs are expected to be created due to USMCA and a total of US$ 235 billion in economic activity could be generated. Companies will have to abide by environmental regulations in Mexico as a result of USMCA, and digital trade provisions are in place to protect American intellectual property. U.S. agriculture and dairy farmers were listed as major winners in the USMCA.

Changing Cities

There is also a trend, already well underway, to leave cities that are considered unfavorable for those that treat capital better. KTAR News out of Phoenix reported that US$ 1.58 billion investment advisor Smead Capital Management has lost patience with the unrest in Seattle and is seeking a more stable home in Arizona. CEO Cole Smead told the station “There really is not a downtown business community today.” The high cost of living was also given as a reason for the relocation. Things have reached the point that on June 24, 2020, a lawsuit was filed against the city from residents and business owners who are angry after “Seattle’s unprecedented decision to abandon and close off an entire city neighborhood, leaving it unchecked by the police, unserved by fire and emergency health services, and inaccessible to the public at large,” according to the lawsuit. This would be the CHAZ/CHOP zone, home of Seattle’s shuttered East Precinct. Seattle Mayor Jenny Durkan says order will be restored after three shootings have occurred in the zone.

Seattle and Portland have faced a homelessness and drug epidemic playing out in the streets, trails, and even neighborhoods for several years. Iconic northwest company Columbia Sportswear threatened to leave years ago. CEO Tim Boyle came out against the disorder he saw, only to become the target of an organized protest. Boyle shrunk under the pressure and has stayed put, but other companies haven’t made the same decision, especially in light of rising taxes and coronavirus interruptions. Northwest outdoor gear make Dakine is no longer calling Oregon home. Considered a signature Oregon brand, Dakine had been in a scenic area outside Portland since 1986. Senator James Manning, a Democrat, had a message for the businesses that were seeking a way out: “I say let ‘em leave. Somebody else will come in.”

Where will companies go? The Lone Star State’s doors are open and the lights are on. The Dallas Morning News reported in May that “Texas was the top destination for corporate moves in 2019.” Texas is considered business-friendly, with a more affordable cost of living. Arizona and North Carolina are also considered hot spots for companies looking to save on expenses and provide a high quality of life for employees. Tesla’s Elon Musk is interested, suggesting that California had given him the “final straw” that could change the future home of the headquarters and possibly the production line as well.

Keywords: Norway Government Pension Fund Global.