Country Indices Flash Report – June 2023
Global central bank policies diverged during the month. The U.S. paused rate increases, while Australia, Canada, the European Union and the UK continued to raise rates. Notably, the UK surprised markets by increasing rates another 50 basis points in response to headline inflation at a stubbornly high 8.7%. U.S. year-over-year inflation fell to 4%, its lowest level since March 2021.
Country Indices Flash Report – May 2023
The debt ceiling crisis weighed on equities and currencies globally. All but two EAFE markets declined on a local basis and all currencies (except the pegged Hong Kong dollar) fell versus the dollar in May. The crisis briefly pushed near-term U.S. Treasury Bill yields above 7% for the first time in more than 30 years.
Country Indices Flash Report – April 2023
Developed markets continued their strong run relative to domestic, with most major regions’ performance ahead of the U.S. market in April. European markets, in particular, built on momentum since late last year.
Quarterly International Equity Strategy Q1 2023
Economies worldwide have proved resilient in the face of stubbornly high inflation and monetary tightening, and equities were rewarded with strong returns in the first quarter of 2023. Heightened concern over banks’ stability held back the financial sector, but elsewhere the rebound begun in the fourth quarter of 2022 remained in full swing. Europe’s momentum continued, backed by exports to a re-opening China and ever-cheaper energy; the Eurozone is increasing in the strategy’s model rankings and positioning. Despite Information Technology’s preponderance in the US and market leadership for the quarter, overseas markets kept pace, supported by modest strength in currencies such as the euro and pound, and company fundamentals within sectors. We believe that this latter source of strength—resiliency of earnings and convergence of multiples towards levels seen in US peers—will prove a long-term tailwind for international equities’ performance.
Quarterly Technology Science Equity Strategy Q1 2023
The Bailard Technology & Science Composite (the “Composite”) posted a Q1 total return of 21.62%, net of fees, meaningfully ahead of the competitor-related benchmarks, with the Morningstar U.S. Open End Technology Category return of 17.48% and the Lipper Science and Technology Fund Index return of 17.88%. The Composite was also ahead of the top-heavy S&P North American Technology Index return of 21.45% and the mega-cap Nasdaq 100 return of 20.77%. Over longer measurement periods of 3, 5, and 10 years, the Composite’s net returns continue to lead the competitor’s peer group benchmarks.
Country Indices Flash Report – March 2023
Global banking was rocked by failures of two major U.S. banks and the rescue of Credit Suisse by UBS. Regulators protected creditors and provided emergency liquidity, but worries remain about the impact of rate hikes on lenders. Central banks worldwide must now consider financial stability, in addition to inflation and economic growth, when setting interest rates.
Fintech: The Engine Accelerating Financial Inclusion
Eric Greco, Equity Analyst, explains how the advancements of fintech companies are helping to provide the unbanked and underbanked with access to a broader range of often-crucial financial services.
While substantial progress has been made in the 15 years following the Great Financial Crisis—largely attributable to socioeconomic gains—significant barriers remain within the U.S. financial services industry. There is a need to address the millions of unbanked and underbanked Americans who lack adequate access to traditional banking services. The unbanked and underbanked populations are disproportionately low-income, minority, and immigrant households. They face a range of obstacles from high banking fees and minimum balance requirements, to limited branch access. These barriers largely keep them confined to an ecosystem outside the conventional financial system.
According to the Federal Deposit Insurance Corporation’s (FDIC’s) 2021 National Survey of Unbanked and Underbanked Households survey, 4.5% of U.S. households (or 5.9 million) were unbanked in 2021, meaning that no one in the household had a checking or savings account. This represents a decline from 5.4% or 7.1 million households who fell into the unbanked category in 2019, the lowest since the survey began in 2009. Additionally, an estimated 14.1% or 18.7 million households were underbanked, meaning that they had a bank account, but also used alternative financial services like money orders or payday loans. This represents a decline from 16.0% or 21.0 million households who fell into the underbanked category two years prior.1
The Rise of Nonbanks
In recent years, there has been a surge in the popularity of digital payments and mobile banking platforms (“nonbanks”) that offer peer-to-peer payment and banking services, such as PayPal, CashApp, (subsidiary of Block), Chime, and Venmo (subsidiary of PayPal). These platforms, which allow users to send and receive money electronically, have been a gamechanger for many individuals who have historically been underserved by traditional banking institutions.
Coinciding with the rise of smartphone ownership in the U.S.—over 85% of adults in 2021 reported smartphone ownership according to the Pew Research Center—digital payments and mobile banking utilization have skyrocketed. Mobile banking usage rose from 15.1% of households in 2017 to 43.5% in 2021.2 This provides a unique opportunity for mobile payment and banking platforms to service the very members of our society who lack basic access to traditional banking services. Look no further than the global remittances commonly used by immigrants to send or receive funds cross-border to family and friends. Visa recently published data showing 53% of consumers are now leveraging mobile, peer-to-peer apps to send funds globally, versus 34% utilizing a physical bank and the remaining 12% sending cash, checks, or money orders by mail.3
Addressing Financial Inclusivity
Financial inclusion, which refers to the process of bringing unbanked and underbanked populations into the traditional financial system, has come to the forefront as a critical issue. These populations face significant barriers to accessing financial services and products, which hampers the ability to save, invest, and build financial stability. In the United States, financial inclusivity has improved over the past decade as numerous fintech companies within the digital payment, neobank, and mobile banking vertical (both publicly traded and private companies) have emerged and addressed some of the inequities facing the unbanked and underbanked.
Fintechs, leveraging AI and predictive analysis tools, have not only made certain features more ubiquitous—such as free debit card issuance, early direct deposit, no account minimums, no monthly fees, and zero overdraft fees—but have also disrupted and triggered significant change across the digitally-enabled-user banking experience provided by traditional banks. Additionally, nonbanks often have less stringent requirements for opening an account than conventional banks. Chime, for example, does not require a credit check to open an account, making it more accessible to those with poor credit or no credit history.
Fintechs have not solved every issue of financial inclusion across the financial services industry, but they certainly have driven innovation, inclusivity, and disruption. These are key characteristics Bailard’s Technology Equity Research team looks for as it screens investment opportunities in the financial services industry.
In addition to offering low-cost financial services, nonbank providers also offer financial education and literacy for the unbanked and underbanked. Many platforms offer educational resources and tools that help users understand financial concepts and manage money more effectively. This is particularly useful for people who are new to financial services and may not have the knowledge or experience to make informed decisions. For example, CashApp offers a free financial education program called CashApp Boost, with tips on budgeting, saving, and investing. Similarly, Venmo provides resources and information on personal finance, such as how to build credit and manage debt. These enhancements can be particularly valuable for the unbanked and underbanked, who often lack access to financial education.
Fintech Product Development
We also note a trend in nonbanks driving financial inclusion through new products that are more tailored to the unbanked and underbanked. Many of these new offerings have provided an avenue towards escaping the predatory payday loan industry. It has not been uncommon for payday lenders and loan sharks to take advantage of financially-vulnerable individuals by offering cash-strapped customers exorbitantly high interest rate loans, ultimately making repayment burdensome.
Anecdotally, it is more common for digital payments platforms and mobile banks to offer loans and credit payment products—such as buy now, pay later—to consumers with limited access to broader banking services. While certain aspects of the terms behind these products have received scrutiny, these loans are typically more favorable and more accessible to low-income individuals. Offerings such as buy now, pay later, are generally structured to allow a consumer to make four interest-free payments every two weeks. Again, while fintechs may not be reinventing the wheel as it pertains to loans and credit offerings, they are forcing traditional banks to optimize their products in order to be more competitive.
CashApp’s free debit card (called Cash Card) offers “Boosts,” allowing users to earn discounts and rewards at select merchants. This rewards-like feature linked to a user’s debit card is still relatively nascent. The benefit of helping users save money on everyday purchases can be particularly valuable for low-income households. As another example, Venmo offers Venmo Credit, which is a line of credit that can be used to make purchases. With often limited access to credit, the underbanked segment is likely to find this especially useful. Usage of Venmo Credit allows the underbanked an avenue to make purchases and build credit history, both of which can greatly aid future financial stability.
All that said, it’s imperative we highlight the importance of ensuring accounts are FDIC-insured in light of the recent volatility in the banking sector surrounding bank deposits. Users of mobile payment and/or banking platforms should be aware that not all banking institutions are insured by the FDIC. Numerous fintechs catering to digital payments and mobile banking are registered banks or leverage partner banks for FDIC insurance. However, this is not always the case and may often depend on the type of product and services being utilized. Nonbank payment companies are typically subject to less rigorous regulatory oversite than traditional banks. Users of nonbanks may be subject to contractual rules and procedures that are not supported by federal statutory or regulatory standards, resulting in fewer of the protections afforded to bank customers.
In Summary
Nonbanks have emerged as key players in promoting financial inclusion for the unbanked and underbanked in the U.S. Through digital payment services, savings accounts, loans, and educational resources, nonbanks have made it easier for individuals to access more traditional financial services.
Make no mistake about it, many of the consumer-friendly banking and financial services brought to market by fintechs have forced traditional financial institutions to reevaluate product offerings and adopt more consumer-friendly policies, while also modernizing user experiences to mitigate attrition across business lines. In our view, this has the potential to continue improving financial stability and increase economic opportunities for millions of Americans who are currently excluded, in some form, from traditional banking services. As such, emerging fintechs and nonbanks are likely to play an increasingly important role in promoting financial inclusion with a strong positive societal benefit for years to come.
1 https://www.fdic.gov/analysis/household-survey/2021execsum.pdf
The Demand for "Attainable A" Multifamily Housing
Jamil Harkness, Research and Performance Associate, offers a broad introduction to the potential for attractive investment opportunities in a segment of the multifamily property type that Bailard defines as “Attainable A.”
The Bailard real estate team has long believed in the advantages of investing in multifamily properties, mainly for the consistent cash flow, manageable volatility, lower capital intensity, and the asset type’s ability to adjust to broader economic conditions more quickly.
Supply & Demand
In the largest 40 U.S. metropolitan areas, roughly one-third or 4.5 million units of the multifamily housing inventory (defined as apartment complexes of 20 or more units) comprise Class A units. Within this category, the more expensive “trophy luxury A” and “luxury A” tiers represent 11% and 52%, respectively. The lower-cost end of the Class A spectrum, the remaining 37%, represents what the Bailard team defines as “Attainable A” properties.
According to CoStar, multifamily supply and demand dynamics at the end of 2022 favored Attainable A properties. As a result, despite a general slowdown in demand across all segments and geographies in the past year, the vacancy rate for Attainable A only increased by 1%, reaching 6.4% by year-end 2022. In contrast, the vacancy rate for trophy luxury A and luxury A properties increased by 1.2% and 1.1%, respectively, ending the year at 8.7% and 9.2%.
Rents for Attainable A increased 3% year-over-year in 2022, with the average asking rent for all unit types within this segment reaching $1,726 per month. Comparatively, average asking rents for trophy luxury A and luxury A reached $3,425 and $2,250 per month, respectively: rent growth of 2.6% and 2.3%, substantially lagging Attainable A.
Defining Attainable A
The Bailard Real Estate team defines Attainable A as high-quality, well-amenitized, recent-vintage, moderately priced multifamily properties generally located in close-in and first-ring suburban markets. Attainable A differs from trophy luxury A and luxury A in several respects, including design, materials, finishes, amenities, and locational attributes. Exhibit 1 enumerates a variety of features that help frame the similarities and differences of the three Class A apartment segments.
Middle-income renters account for 54.3% of U.S. renters and the majority fall within the 22 to 45 age group, which comprises Gen Z, Millennials, and Gen X. Almost half, 49.6%, either live alone or with roommates. A sample of the kinds of occupations that provide the foregoing levels of compensation are as follows: carpenters, plumbers, firefighters, police officers, office managers, nurses, teachers, sales associates, marketing managers, surgical technologists, IT professionals, project managers, and real estate agents.
Data obtained from Costar indicates trophy luxury A and luxury A one-bedroom apartments in urban or in-fill neighborhoods average $3,000 and $2,100 per month, respectively, making them unaffordable for most middle-income individuals. However, an Attainable A one-bedroom apartment in a first-ring suburban market rents for approximately $1,440 per month. To qualify using the traditional “35% of salary” rent affordability metric, a $49,000 annual income is needed for Attainable A, while $102,000 and $75,000 per year is the baseline for trophy luxury A and luxury A properties.
The Case for Attainable A
Over the past decade, the 40 largest metropolitan areas have seen completed construction of 2.9 million multifamily units. Class A apartments, across all segments, accounted for 86% of these new deliveries. However, only 587,000 Attainable A apartments were constructed, only a quarter of that large Class A pie slice. Many middle-income Americans are experiencing limited affordable housing options.
Despite the modest number of Attainable A apartments completed in the last ten years, the middle-income renter pool remains sizable. In fact, the proportion of middle-income earners in the U.S. has remained stable at around 51% of all workers, versus 52% in 2012. However, due to employment and population growth, the absolute number of full-time working earners has substantially increased in that same period. According to data from the Census Bureau and Pew Research, across the 40 largest metropolitan areas, 3.5 million new middle-income earners were added to the workforce over the past decade. Given the sheer size of the pool of working adults in the middle-income bracket—which is growing and constantly being refreshed by new (and younger) workers entering the labor force—Attainable A product is an attractive and affordable option.
Another crucial factor that has recently expanded the growing renter pool, especially for those in the middle, is the declining affordability of single-family homes. Due to the recent increases in interest rates, the average 30-year mortgage rate reached 6.5% in Q4 2022, up from 2.7% in 2020.1 Average home prices have also increased dramatically (33%) over that same two-year period, from $403,900 to $535,800. Assuming a 90% loan-to-cost, 30-year amortizing mortgage, the average monthly mortgage payment is $1,570 higher than average multifamily rents. The widening rent-to-own gap is illustrated in Exhibit 2; the pool of renters is expanding beyond middle-income earners to higher-income earners who may have previously considered buying a home, but can no longer afford to do so.
Beyond that, local zoning regulations remain resistant to new multifamily projects in favor of single-family housing in nearly every state nationwide. And, last but not least, labor availability has the potential to curtail housing development generally, particularly multifamily construction, as the workforce is not expanding at the rate necessary to meet demand.
Conclusion
Attainable A multifamily properties offer good value within the Class A universe, providing high-quality residential options to millions of renters who either cannot afford, or do not wish to live in, trophy luxury A or luxury A apartments. The Attainable A product segment is well positioned to continue to be a strong performer due to population/demographic trends, favorable supply/demand dynamics, and the unfavorable affordability challenges for single-family home ownership. And, given the expected growth of the target renter pool across the country for the foreseeable future, the need for housing, especially affordable housing, is more acute than ever.
1 https://fred.stlouisfed.org/series/ASPNHSUS , https://fred.stlouisfed.org/series/MORTGAGE30US, CBRE-EA
2 CBRE-EA: Construction Costs Trends, Released November 2022