Political Risk and Investing
There’s no avoiding it — we’ve live in a volatile time in American politics. Despite the polarization and frustration, there is still at least one key area where Americans broadly agree. Whatever our political affiliations, all of us want growth and stability in our investments.
Does political risk really affect our investing prospects? On one hand, the market has seemed relatively indifferent to Washington politics in recent years. The US economy is vast, decentralized, and deep. Since the financial crisis, business-as-usual has returned. Financial markets have slowly and continuously marched upward, with or without sober national leadership.
On the other hand, there’s no guaranty that politics will not start to harm the investing world. We have benefited from decades of relatively stable economic policy, which has not differed dramatically, no matter what party controls Washington. That may be changing, and we should be prepared.
There are a few key ways that problems in Washington could impact investors. Trade wars, rising interest rates, and inflation stand out to me as the biggest dangers. Thankfully, the single tenant net lease commercial real estate in which we operate is relatively well insulated from these scenarios.
Bad trade policy can do a lot of damage to the economy, and there’s a real risk that this could impact the profits of countless American companies, which in turn threatens the stock market. Fortunately, Alliance’s real estate investments have little to do with international trade. We invest in commercial properties with solid prospects for doing business in local communities. Washington doesn’t have much to do with it.
Our focus on niche healthcare tenants makes Alliance’s investments about as well insulated from Washington as anything in the American economy. No matter what happens with trade or health reform, Americans will still need healthcare, and care providers will still need the specialized medical facilities we love investing in.
While Washington might not have much effect on Alliance properties, local politics matters a lot. To deliver safe returns for our investors, we invest in business-friendly jurisdictions, often in the south. Local taxes, zoning, regulations, and demographics are make-or-break issues for our investments, so great research and strong relationships are the key. We always deeply understand the markets where we work, and we cherry pick great assets in locations that offer the best prospects for strong and stable returns.
Responsible leverage lets us lock in today’s low interest rates for years to come. By also signing long term leases with high quality businesses, we avoid most of the volatility associated with interest rate changes. Financing assets with debt also offers valuable protection against inflation. If inflation rises significantly, the value of our debt decreases, proportional to the decrease in the value of the rent we receive.
We lease real estate to stable tenants that are needed by their communities in good times and bad. When things looks bad, our single tenant net lease real estate niche is well protected from the downside of political risk. And when the good times come, our properties still benefit from upside potential — when communities boom, so does real estate.
With a decade of chaos in Washington, plenty of uncertainty about policy changes to come, and stocks and bonds trading at historically high prices, I’m happy that my family’s future is invested in commercial real estate. Alliance has built an island of financial stability – a great shelter in the storm.
