Today’s Daily Reckoning Australia begins with a hat tip to an old colleague: Chris Mayer.
Chris is now a fund manager in the US. For 10 years he wrote an investing newsletter for the Daily Reckoning’s parent company.
Why does he return today to these pages, in spirit if not in name?
Last week Chris mused on an investment theme he’s been mulling over lately: the shortage of the industrial land in the major metro markets of the US. We can say the same about Australia probably.
The idea doesn’t end there. There’s also the massive competitive advantage that some companies carry over others. It’s those that invest in land over time.
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Imagine two businesses. Both run an operation that handles cars written off after big accidents.
They can be sold for parts or scrap metals. One firm acquires land to store its inventory in the metro area. The other leases it.
In the short term both are likely to show equivalent earnings. Perhaps the firm leasing the land has a slightly lower rate of monthly expense.
But over time the firm that buys land generates a massive competitive advantage because land costs (or rents) keep inflating.
That’s not all. Ownership of the land provides potential optionality for a different use value.
For example, a big industrial lot is worth a lot more full of apartments or data servers than totalled Commodores and Toyotas.
Pray, why do we care?
ASX Companies with Land Inventory
Right now, is our opportunity to acquire firms that have this kind of ‘land inventory’ before the imminent property inflation becomes fully priced in by the market.
And if you can find a firm that’s aggressively acquiring land now, all the better!
That might sound slightly unusual in a time of clear economic distress because of the COVID-19 crisis. But there’s a staggering amount of money floating around the world economy right now looking for a home.
It will flow into anything that can’t be created on a printing press. Gold and bitcoin tend to get the attention from the inflation hawks.
And while gold glitters, an inflation hedge it need not be. It can be anything that’s ‘hard’. It could be copper, a barrel of oil, or property.
Property is much easier to buy and sell than crude futures or copper concentrate, so it will attract the most money.
And while it’s true that CBD rents and apartment prices are falling, that doesn’t take the whole market down with it.
The value doesn’t disappear in total, it simply shifts to regional ‘zoom’ towns and other areas benefiting from the ‘COVID’ economy.
Everything the federal government and the Reserve Bank has done is designed to prop up real estate values.
HomeBuilder is causing a surge for cheap land in the new estates. The removal of responsible lending laws will allow the banks to finance more property transactions.
And it’s also possible the Reserve Bank cuts interest rates again. There’s a side effect of this that few probably appreciate. I’ve seen nobody else mention it, anyway.
It’s this: Any further move down in Australian government bond yields will give existing bond holders further capital gains.
The banks are transacting huge numbers of bonds because of the enormous issues of federal debt happening, to finance the gargantuan deficit Australia is now running.
The banks can realise these capital gains to help build up their capital buffer. This means they can write-off their bad debts without becoming structurally weak, as happened to the Greek and Italian banks after 2008.
It’s also how the Fed bailed out the US banks after the 1990 recession. These types of financial shenanigans can work another way too.
For example, the RBA is prepared to finance the banks at 0.25%. They can immediately buy an ultra-secure Australian 10-year bond yielding 0.84%. The difference — the ‘spread’ — is pure profit for doing…nothing.
Thus, I see no bank collapse on the horizon: one of the preferred nightmare visions of the property bears.
It’s highly likely that the complete opposite happens. That’s why 2020 is a gift for those with the resources to take advantage of any property weakness. The coming tidal wave of money is coming to bid it up into new highs.
Best wishes,
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Callum Newman,
Editor, The Daily Reckoning Australia
PS: I reveal the unexpected impact of the lockdown I see on the property market — where real estate prices could take a short-term hit before quickly rising to new heights. Click here to learn more.
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