January 15, 2019
Policy decisions, including zoning and land-use regulation, fiscal health, and tax reform, carry important implications for real estate professionals evaluating potential acquisitions and developments, as noted by new research by Green Street Advisors. Property investors with a keen awareness of government policy are expected to gain an underwriting edge over those who ignore its impact because policy shifts are often not priced into property markets.
Green Street’s Dave Bragg says its research team has heightened its attention to policy issues, often uncovering meaningful implications for the underwriting of property sectors, markets, and REIT stock-picking.
In terms of land-use regulation, a popular property investment strategy centers around “high-barrier” metros, where land and cost are perceived as constraints on new supply. But, a focus on these factors ignores the biggest impediment to supply growth: land-use regulation. Green Street’s regulatory constraint framework considers the incentives and influences of residents and cities in an effort to separate markets that are truly supply-constrained from those that aren’t. Bragg writes, property investors mindful of major land-use regulation inflection points will possess an underwriting edge.
Fiscal health is a complex and long-term issue. Yet, property investors typically pay less attention to seemingly far-off issues such as unfunded government pension liabilities. Green Street’s Bragg warns, fiscal health is one of those problems that is so large and has such strong odds of mattering that it is arguably just as or more important than the near-term outlook. Still, Green Street notes it does not appear to be priced into property markets. As such, opportunities exist for investors to steer clear of the markets in the worst shape.
Other issues to watch closely, says Green Street, include the shifting federal tax burden and idiosyncratic policy initiatives. That may include such threats as California’s Prop 10, which was defeated, though a looming Prop 13 “split roll” initiative is on the ballot in 2020. It would tax commercial real estate based on fair market value, as opposed to the current assessment of the purchase price plus a maximum increase of 2% per year, and it would retain Prop 13 protection for all residential owners, including apartments and single-family homes.
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