Monday, January 30, 2012

MBA Global Trip: South Africa

As part of our Meet Our Current Students series, first-year real estate MBA student Andrew Toby reports on student real estate activities and life in general. Also, news stories such as this are available in our monthly newsletter, which you can sign up to receive via Constant Contact.

Each year, the Wisconsin School of Business provides students the opportunity to take an international business class that focuses on a specific country. In this class, the economy and business environment of the particular country are researched and discussed in anticipation of actually traveling to the country and visiting local businesses.

I, along with fellow Real Estate student Jay Jambor, joined 8 other WSoB students in one of this year’s International Business courses: South Africa. Each week in October and November we met for an hour and took turns educating each other on the pressing issues that the South African economy currently faces: post-apartheid racial segregation, unemployment, educational barriers and disparity, distribution of wealth, crime, AIDS epidemic and other healthcare issues, etc. These classes enabled us to having a better foundation of knowledge prior to visiting local companies and allowed us to ask more pertinent, focused questions during the presentations.

The trip to South Africa (“SA”) began in Johannesburg. During our 3 days in SA’s largest city, our company visits included Eskon (the dominant electricity provider for the country), Munich RE, the American Chamber of Commerce, and the Johannesburg Stock Exchange. Each organization began with a comprehensive overview of their operations as a preface to the most pertinent question: what are the challenges of doing business in SA? We found it very insightful to hear the opinions of the executives that we spoke with (which included both men and women of different ethnic backgrounds). In fact, most of these viewpoints on the pros and cons of their country’s economy were drastically different from one executive to the next. While opinions on certain issues remained consistent (the fact that near 40% unemployment is unhealthy and the AIDS presence is overwhelming are facts that are pretty easy to agree upon), other topics brought on entirely different perspectives.

This however, in reality, doesn’t come as a surprise. As time passed in Johannesburg, I became more and more acutely aware of how divided the population is. Joburg seemed to function as a relatively normal city would (with perhaps an even greater amount of expensive cars on the highways – another thing I discovered is that the South Africans opt to display their wealth in the form of a BMW or Audi). However, when traveling to the nearby town of Soweto to visit Nelson Mandella’s old home, we were amidst a sea of shanty towns, a level of poverty beyond anything I had seen. Our driver put it into perspective when he said this: “Take this man here [pointing to a black man sitting in the back of a pickup truck driving down the street]. I know nothing of this man’s life, his background. I have no idea what he does to operate in this country, to make a living for himself, but I can be almost certain that the way he operates in this country and the way that I operate are entirely different, even though we live in the same city. We speak different languages. We both exist here, but we exist separately”. A fact to consider here is that South Africa has 11 official languages, which doesn’t even include a plethora of local dialect differences. This, coupled with decades of legal racial segregation that just ended in 1994, create a divide that makes it no wonder why the population disagrees on political issues.

Johannesburg served as an extreme juxtaposition to our next destination within the country: Cape Town. In between cities, however, we made a quick weekend trip to a game reserve in Kruger Nation Park, or “The Bush” as it is known locally. I suppose a trip to Africa isn’t complete without seeing the “Big 5” - the elephant, leopard, lion, rhino, and buffalo. Our adventures out on the jeep provided us with up close interactions with all of these animals and many more.

With its stunning beaches, beautiful landscape, and expanding vineyards, Cape Town easily draws tourists from around the globe despite its remote location. Although too far for many to have a weekend getaway home, we found that many of the rich and famous of the world opt to buy a second home in the spectacular Clifton area of the city (pictured). I asked around to get an idea of what some of the prime pieces of real estate cost in that location, and was given the answer of about R30-R40 million (The “R” stands for Rand, the local currency which trades at about 8:1 with the US dollar currently). Still pretty pricey, but given the fact that the cost of living is far cheaper that in America, I can see how it is an appealing option for those who can afford it.

Our main company visit in Cape Town was Lomold, the largest plastic recycler in the country. While plastic recycling may not seem all that interesting, what sets this company apart is what they are doing with the recycled plastic. They’ve spent over a decade pumping their earnings into the research and development of a machine that will create complex long-fiber plastic palettes. The longer the fiber, the stronger the plastic, and according to the company founder, Lomold is the first company to be able to produce such a strong plastic in a complex form (that is, rather than just sheets of plastic or other basic molds). It will be interesting to continue to follow this company as it hits the global markets with its revolutionary product.

Further highlighting our stay in Cape Town was a boat trip out to Robben Island, where Nelson Mandella was imprisoned for about 27 years. Similar to Alcatraz but on a larger scale, Robben Island imprisoned the individuals whom threatened or otherwise spoke out against the Apartheid government.

Adding in some leisure time for beach lounging, wine tasting, fine dining, and even a cage dive with great white sharks, the trip really rounded out to be an amazing experience both personally and professionally. A big shout out goes to our class advisor, Assistant Dean Blair Sanford, whose steadfast leadership kept us organized and was key in the trip’s success.

Andrew Toby is a first-year MBA student in the James A. Graaskamp Center for Real Estate. A CPA from California, Andrew hopes to utilize both his accounting background and the knowledge gained in the MBA program to pursue a career in private equity investments in real estate.

Monday, January 23, 2012

Wisconsin full-time MBA ranks in top 25 in new survey

In case you missed this item last month from the Wisconsin MBA program, here is some good news from a new survey of U.S. MBA programs:

The Wisconsin School of Business placed 24th in Poets and Quants’ MBA rankings for 2011. Last year, the school held 30th place. This six-point gain was the most notable increase in the list's Top 25.

P&Q’s list is a composite of the rankings done by Bloomberg BusinessWeek, The Economist, The Financial Times, Forbes, and U.S. News & World Report. These rankings, in turn, rely on surveys of recruiters, graduates, and deans - as well as other qualitative and quantitative data.

Poets and Quants is headed by John A. Byrne, former editor-in-chief and creator of BusinessWeek’s rankings of business schools.

This is the first time the Wisconsin School of Business has placed among P&Q’s Top 25. Click here to see the Top 100 U.S. MBA Programs of 2011.

Click here to visit the Newsroom at the Wisconsin School of Business.

Thursday, January 12, 2012

What's next for the economy?

The Graaskamp Center publishes a monthly newsletter on issues and events in the real estate industry and UW real estate community. The January 2012 issue includes this look at the year ahead by members of our faculty and executive Board of Advisors.

With 2012 upon us and a presidential election fast approaching, many of us are trying to make sense of economic news and data that alternately points to a potential stabilization and recovery or to a double-dip recession and a global debt crisis. What should the next administration do about to support economic growth? And how will the spill over from the debt crisis in Europe impact the U.S. economy now and in the future?

To get a better idea of what to expect, we asked a panel of Graaskamp Center board members and our own faculty experts to share their insights and wisdom on these important topics.

David Neithercut, President and Chief Executive Officer (CEO) and a Trustee of Equity Residential, assumed the CEO title on January 1, 2006 and has served as President since May of 2005. From January 2004 to May 2005 he served as Executive Vice President of Corporate Strategy, leading the company's Transactions, Portfolio Management, Development, Condominium and Research groups. From 1995 until August 2004, he served as Equity Residential's Chief Financial Officer. In this role he was responsible for all of the company's capital market activities and participated in debt and equity offerings as well as merger and acquisition activity with a combined value in excess of $10 billion. Mr. Neithercut is a member of the Board of Directors of General Growth Properties (NYSE: GGP), a leading owner and operator of shopping malls.

Timothy Riddiough is the E.J. Plesko Chair of Real Estate and Urban Land Economics, Director of the Applied Real Estate Investment Track (AREIT), and Professor of Real Estate at the Wisconsin School of Business. He teaches courses in Real Estate Finance, Real Estate Capital Markets, and Microeconomics and is best known for his research on real options, mortgage pricing and strategy, and land use regulation. Professor Riddiough is best known for his work on credit risk in mortgage lending, mortgage securitization, real options, REIT investment and corporate finance, and land use regulation.

Michael Robb is Executive Vice President for the Real Estate Division of Pacific Life Insurance. He joined Pacific Life in 1976 and after holding a variety of executive positions with the company, Mr. Robb was elevated to his current position of Executive Vice President of Real Estate Investments in January of 1995. He is responsible for managing a real estate portfolio of commercial mortgage loans, commercial mortgage backed securities, unsecured REIT debt, equity real estate, and servicing portfolios of over $19 billion dollars.

David Shulman is Adjunct Professor and Advisor to the Applied Real Estate Investment Track (ARIET) for the Graaskamp Center for Real Estate. He is also Managing Member of David Shulman, LLC. Shulman was formerly a REIT analyst and managing director at Lehman and was employed by Salomon Brothers, Inc. in various capacities. Professor Shulman has been widely quoted in the national media and coined the terms "Goldilocks Economy" and "New Paradigm Economy." In 1990, he won the first annual Graaskamp Award for Excellence in Real Estate Research from the Pension Real Estate Association.

Question: Since becoming President, Barack Obama and his administration have implemented many fiscal/economic programs and initiatives to jumpstart the U.S. economy. In your opinion, what were the actual results of these programs? Have they helped or hurt the economy?

Neithercut: I think that much of what took place at the onset of the financial crisis was necessary to avoid a total collapse of the global financial system. The government did what it needed to do to stop the problem. From that point forward, I think the government's programs have not harmed nor helped but have been totally ineffective and is a pretty clear example of the government impeding the market's ability to right itself.

Riddiough: At the macro level, results have been mixed at best. Let me focus on one of his particular initiatives, as it illustrates what I believe has been Obama's biggest problem with managing the economy. His whole approach to addressing the foreclosure crisis, although well intentioned, has been confusing and inconsistent. Worse, it has been ineffective and has created additional uncertainty in housing and banking markets. Ineffective and inconsistent policies have created additional uncertainty in an already very uncertain economy.

Robb: I have seen no result whatsoever. There is the Canadian shale fracking project "shovel ready" which would create thousands of jobs which he and the environmentalists won't approve. The housing fix or lack thereof is a joke and he still does nothing but blame the Republicans for the mess we are in.

Shulman: The initial stimulus marginally helped, but the whole notion of "timely, temporary and targeted," is very difficult to implement. Moreover too much of the spending represented the accumulated wish list of the House Democrats. Indeed the support for state and local government probably hurt because it delayed the ultimate restructuring that has to take place. The biggest failure is that "reform" is the enemy of economic growth in the short run. As a result the healthcare legislation likely slowed the economy along with all of the uncertainty associated with the energy bill that failed in the Senate.

Question: Given the current state of politics and the economy, what should Obama or the next administration do to improve and stabilize the economy? In other words, where do we go from here, and how do we avoid making the same mistakes in the future? Please outline three or four points that you feel are most pertinent to you as a real estate professional or to the real estate industry in general.

Neithercut: The answer to our problems can be found in economic growth. We can't tax our way out of it and we can't spend our way out of it. Growth is the answer and I think that growth has been hampered by uncertainty on tax policy, etc. Real estate needs growth to prosper--growth in jobs, growth in income and spending, etc. Economic growth is not evil but is the means by which all else is possible. We need to facilitate credit to small business and have a tax policy that is consistent and fairly applied.

Riddiough:This is a hard question to answer because there is a big difference between what should be done in theory and what will actually get done in the current political environment. Given that the U.S. economy does not slip back into another recession, I do not expect that Obama will be able to get much done until after the next election (should he be reelected). I anticipate that only the Fed will execute policy initiatives over the next year in an attempt to improve and stabilize the economy.

Robb: Approve the Canadian shale project. Spend money to retrain factory workers for 21st century job skills. Do away with ALL tax deductions, including mortgage interest , and only keep ones that actually create jobs and finally, go to a 3 or 4 simple tax rate structure, again with virtually no deductions and exempt from taxes anyone making less than $50,000, but force people off the welfare rolls by getting them the under $50,000 jobs. A lot to ask for but would stimulate both individuals and corporations.

Shulman: Policy is trapped because we probably live in world of "Ricardian Equivalence" which means that deficits today mean tax increases and/or program cuts in the future. A new administration should be supportive of domestic energy and the Keystone XL Pipeline should go forward. A real program would include a major infrastucture expansion that would waive or fast track environmental approval and waive the prevailing wage requirements of the Davis-Bacon Act.

Question: Do you think the Europe and United States are headed toward a debt crisis? If so, how will this affect the real estate markets?

Neithercut: Is there anyone who doesn't think that Europe has a debt crisis?!? And we will have one soon if we are not awfully careful. To not learn from the mistakes in western Europe would be criminal. A debt crisis will inhibit growth and that will be very bad for the real estate markets.

Riddiough: There is already a debt crisis, and it has already shut down the CMBS market after that market had reemerged over a year ago. All very bad news. Be aware of the coming crisis in refinancing a mountain of commercial real estate mortgage debt coming due over the next five to six years.

Robb: They are not headed towards a debt crisis; they are IN ONE. Will only hurt real estate if rates go way up-right now, in this artificial low rate environment, it is actually helping commercial real estate.

Shulman: Europe is in a recession. The U.S. will escape its worst effects providing the Euro crisis does not morph into a banking crisis. Obviously a banking crisis would bring back memories of the Lehman crisis in 2008.

The Graaskamp Center's newsletter The Real Estate Connection is published monthly. You can subscribe (via Constant Contact) here.