08 Mar

Should You Move To Actively Managed Assets?

It’s very likely that the Federal Reserve will start with raising interest rates. This will cause the interest rates to rise very quickly, although I can’t say when will this happen.

It’s quite possible that the Fed will take action in the first half of 2015. But in case stock markets become unstable or if the economy doesn’t show signs of improvement, the Fed might not act at all.

The Fed keeps printing money because it expects this will speed up the economy and reduce the unemployment rate.

If you remember, the Fed bought treasury notes and mortgage-backed securities in November 2008. Bank debt was $2.1 trillion by the end of June 2010. $30 billion was printed, each and every month.

2011 was the year when the Fed started buying Treasury securities in amount of $600 billion. September 2012 saw the Fed printing $40 billion per month. This was increase just 3 months later – to $85 billion per month. The Fed’s balance sheet increase to $4.5 trillion.

All this money printing should generate inflation, but that didn’t happen. Since there’s so much money being printed, each and every month, we are bound to experience the inflation. Currently, it’s the 0% cap on federal funds rate that keeps the inflation at bay. But when this cap disappears and when interest rates start to rise, increase in inflation will occur.

As inflation rises, interest rates and capitalization rates will rise. Real assets will decrease in valuations, which will have a negative impact on real estate assets with single tenant leases. These assets will be sold at a higher rate and they will lose value. Therefore, the investors will take a hit as well.

This is why investors should shift their investments to actively managed assets that have inflation protected leases. Also, they should look for real estate assets that can be redeveloped, remarketed and repositioned.

At least 77% of the nontraded REITs have triple net leases with no rent increases. In case REITs have to dispose of these assets within a certain timeframe, they will take a hit.

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