An ocean of money heading for commercial property

Thursday, 21 April 2022 — Albert Park

[5 min read]

Dear Reader,

1) ‘WTF!’

My friend Stewart texted me this yesterday. He’d logged into his broking account and saw that his Ramsay Health Care shares were up 25% at the open.

The joys of a takeover offer!

There’s been a bit of commentary, naturally, about all this. I know diddly-squat about Ramsay or whether the offer is a good one.

But one line caught my eye in the report on the bid from the Australian Financial Review. If the deal goes through, the ‘takeover would rank as the biggest private equity-backed buyout of an Australian company’.

Y’all know these private equity firms like to use debt to finance these types of deals, usually.

Hmm. Are you thinking the same as me? We usually get these mega deals closer to the top of the market than the bottom.

Merger and acquisitions activity has been pretty hot for a while.

Put it like this, perhaps: it’s not a time to be blasé about your market exposure.

Of course, it all depends on your timeline, income needs, and tolerance for volatility.

If you’re happy to hold for years, then backing good, long-term prospects is fine by me.

The surest ground I know in the market is…well…land and property!

I told you a week or two ago I was getting interested in the office sector. I keep seeing evidence that the market is now looking beyond the immediate weakness in rents to the future.

And the market sees the office remaining relevant.

For example, what do we see just today?

Property behemoth Charter Hall is raising $75 million for a fund to go shopping in the commercial sector. Top of the desired list, apparently, is offices and logistics.

Secondly, office vacancies, at an aggregate level across the states, are falling.

But the real test is likely to come from a proposed sell-down of the two big Southern Cross Towers in Melbourne’s CBD.

Their existing owners are looking to cash out for around a $2 billion payday.

Obviously, anyone spending that kind of cash to get hold of them would need to be pretty confident they can rent them out! Watch this space.

The good news for you and me is that some of the real estate investment trusts (REITs) on the ASX are still trading cheap cheap cheap! You know the reason.

COVID kicked them between the legs and then added a squirrel grip for good measure.

Now the pain is easing.

We also have the additional factor of current global inflation driving anyone with a brain to protect their purchasing power via property as an inflation hedge.

There’s a potential ocean of money that could wash over the property market here.

Famous property investor Sam Zell turned himself into a multimillionaire back in the 1970s using the same playbook needed today.

I want you to think about Sam Zell here and the current repeat of the inflationary environment of 1974.

Zell explains in his autobiography:

‘Years later, people would ask me, “How did you know when and what to buy?” But all I basically did was create a massive arbitrage — a fixed-rate instrument in an inflationary environment.’

I described all this in much more detail in my latest issue of Australian Small-Cap Investigator.

It’s not just office space up for grabs at a discount. Property plays have been dumped in the last 6–9 months. I reckon it’s time to go shopping!

Do yourself a favour and pick up our latest reports here.

2) Someone else going shopping is my colleague Brian Chu over at Gold Stock Pro.

Aussie dollar gold is a barnstorming $2,600 an ounce…and the US futures keep pressing to break out to more than US$2,000 and signal the boom is back.

Aussie gold stocks have started to rally after their washout from August 2020 to about February this year.

With inflation roaring, Ukraine unresolved, and bonds currently getting routed, gold is a very reasonable proposition right now. Odds on it breaks higher from here.

Make sure to tune in to tomorrow’s The Daily Reckoning Australia for Brian’s latest update on the market.

3) Yesterday, I went to the LUME Van Gogh exhibition in the Melbourne CBD with my wife and eldest daughter. I’m not usually an art person. But I thoroughly enjoyed it. It’s certainly different to the usual museum experience.

Van Gogh’s work is brilliant but his life tragic. It all makes for a very evocative experience. My tip? Catch it if you can.

All the best,

Callum Newman,
Editor, The Daily Reckoning Australia

PS: Don’t forget to check out our podcast here, too. Today, I’ll be chatting to my friend Selva about the lithium boom and the general rise of renewables. Until then!

Dear Reader,

Bloomberg reports: ‘White House to Tighten Russian Sanctions’.

What, exactly, does the US hope to get from the sanctions war? What evidence is there that it will work?

Meanwhile, Canada, which is rapidly getting a reputation for being an even bigger dope than the US, sanctions Russia’s top banker. Bloomberg again:

‘Canada sanctioned Russian central bank Governor Elvira Nabiullina and 13 other “close associates of the Russian regime” in a fresh round of penalties related to the war in Ukraine.

‘It marks one of the first instances where Nabiullina has shown up on a country’s sanctions list since Russia’s invasion of its neighbor in February. Australia previously sanctioned her and the central bank itself has been sanctioned.’

Not that we have any interest in the war…or the sanctions. But today, we puzzle over what people think they know that ain’t so.

Little or nothing

Americans, in general, know little or nothing about the long and complicated history of the Eurasian steppe. Yet they believe they know exactly where the border between Russia and Ukraine should be. And they’re willing to fight to the last drop of Ukrainian blood to keep it where Stalin put it.

Do Canadians think Ms Nabiullina has done something wrong? What is the charge? Where is the evidence? Where are the judge and jury?

What then is the basis for punishing her? They must think that it will somehow force Mr Putin to change course. In effect, she has been taken hostage…now, they vow to cut off her fingers until the Kremlin complies with Ottawa’s demand.

Do the Canuck feds or their American counterparts know what Russia is doing and why; are they really such evildoers? And how about Ukraine? Is it really a valiant defender of liberty and democracy…or a bunch of neo-Nazi thugs eagerly egged on by the West’s warmongers? How do the feds know which side is right? Is either side right?

And how about sanctions themselves? Do they actually achieve the intended results? Good? Bad? How do they know?

By our reckoning, the sanctions are backfiring on the US. They raise US consumer prices (by cutting off Russian energy and grains). The Global Commodities Index (Bloomberg) is up 33% this year. Oil is up 42%. Wheat and corn are up 43% and 32%, respectively.

Higher prices reduce purchasing power, leading to a recession. Russians may get poorer, but Americans get poorer too.

And using the US-dominated financial system as a weapon is forcing Russia, China, India, and others — the most populous countries in the world — to speed up their search for alternatives. The US has enjoyed an ‘exorbitant privilege’ since the Second World War. It gets to ‘print’ a currency that the rest of the world accepts as real money at almost no cost.

But now, the sanctions signal to everyone that the US dollar comes with conditions attached; you have to do as the Yankees tell you. Already, the dollar is in decline in international transactions. China is the world’s leading exporter, not the US. And Russia is the largest single exporter of energy. It won’t be long before they find a way to bypass the dollar completely.

But maybe the feds know something that we don’t?

The pretence of knowledge

One of the most remarkable phenomena of the 21st century is the growth of fake or useless knowledge. We know more and more…but the quality of what we know declines.

The ordinary citizen may get the ‘420’ weed joke, for example, (made famous by Elon Musk’s buyout offer for Twitter) but has no idea how to shuck an oyster or gut a deer.

During our lifetimes, we have watched the evolution of our automobiles from something mechanical that we could more or less see and understand to something beyond our ken. In the 1960s, young men could take off the carburettor, clean it, change the points, adjust the float, and make it work better. Now, there’s no point in opening the hood. We have no idea how the ‘electronics’ work.

But turn the key; they start up. If they didn’t, we wouldn’t buy them. The people who design and build them know what they’re doing. The automakers have to give real value to get real profits. If they don’t, they will go out of business, along with the bad chef, the tone-deaf singer, and the accident-prone electrician.

But what about public policies? Where is the market discipline? Turn the key on sanctions; what happens? So far this century, major public policies have failed to start.

War on Terror — big mistake — US$8 trillion down the drain.

Bailout Wall Street — terrible policy — another US$8 trillion.

COVID panic — unnecessary — US$5 trillion more, gone with the wind.

Sanctions?

Have they finally gotten a major policy decision right? What are the odds?

Regards,

Bill Bonner,
For The Daily Reckoning Australia