Harry Newton's In Search of The Perfect Investment
Technology Investor. Harry Newton
AM EST, Monday, August 3,
2009. Commercial real estate sucks big-time. If you're
a landlord, you can't lease your empty space. If you're an investor in a building
or real estate syndication fund, you can kiss your investment bye bye. In this
world, you'd think you could buy nice buildings for cheap. Wrong. The banks are
like headlight-struck deer. They are afflicted with The Egypt Syndrome
-- denial, denial. (I made that up. It's not brilliant. But it's apt.) The banks
fear if they sell one building for cheap, they'll have to down value all their
other disaster buildings. And that would make their balance sheets look even worse,
i.e. miserable. Remember they no longer have to Mark-to-Market. They can
now mark to fantasy. And since there are a scant few sales (see chart below),
only good news is that temporary retail space is booming. Let's say you want
to sell Halloween stuff. You can rent an empty, broom-clean store for cheap
for a month or two or three. Move out when Halloween is over or the landlord
rents the space to a permanent tenant.
a friend is a landlord. He has vacant retail space. He's just rented it for
three months for what I call "an event retailer." The space used to
rent for $700,000 a year. He rented it now for three months at the equivalent
of $240,000 a year -- a two-thirds reduction. Ouch.
weekend's Economist had a piece it called "The
collapse in commercial property."
Concerns are switching from the residential to the commercial sector
FROM a distance
Potsdamer Platz looks a bit like its old self. Once the central hub of Berlin,
before it was turned into a rubble-strewn no-mans-land divided by the
Wall, it is now surrounded by shiny new towers. Get a little closer, however,
and it becomes clear that many buildings are just façades painted onto
giant hoardings that rise ten stories high between actual office blocks.
makes for a far more pleasant view than that provided by vacant lots. It also
points to an unusual degree of restraint among developers in Europes
second-largest property market (by transactions). The commercial-property
market in most other parts of the developed world is in deep trouble.
property busts, this downturn has not been driven by speculative overbuilding
but by investors overenthusiasm. Commercial property was a popular asset
class for much of this decade. Institutional investors who lost a lot of money
when the dotcom bubble burst were persuaded that switching from the stockmarket
into property would diversify their portfolios and reduce their risk. Cheap
finance was plentiful. Investors could indulge in a version of the carry
tradeborrowing at a low interest rate to buy buildings and counting
on the rental yield and capital growth to more than cover their financing
looked smart when rents and capital values were rising and vacancy rates were
low. But as cheap financing has dried up and economies have tumbled into recession,
investors have become badly exposed. According to Marcus & Millichap,
an estate agent, the office-vacancy rate in Manhattan climbed by more than
three percentage points in the first half of the year, to 11.2%. As tenants
have disappeared, rents have fallen tooby 16% over the past year, Marcus
& Millichap reckons.
have also been badly hit. Moodys, a rating agency, estimates that American
commercial-property prices dropped by 7.6% in May alone, leaving them almost
35% below their peak in October 2007. Prices would have gone down even further
had not transactions dried to a trickle (see chart). Owners are loth to sell
into a falling market, although some distressed sales are occurring.
All this sounds
like a replay of the downturn in the residential-property market, where easy
borrowing terms allowed homebuyers to push prices to extreme levels. To add
to the sense of déjà vu, property loans have also been bundled
into complex financial instruments, known as commercial mortgage-backed securities
(CMBSs). The riskiest of these, mainly those issued between 2005 and 2007,
are now running into trouble.
credit-rating agency, says that nearly $29 billion of CMBSs, around 3.5% of
the total, have become delinquent (ie, borrowers have not kept up interest
payments) in the past 12 months. It thinks the delinquency rate could reach
6% by the end of the year. Richard Parkus of Deutsche Bank reckons the default
rate could eventually reach 12%. Together with bad construction loans, that
could push the losses of American banks on commercial property to $200 billion-230
billion. Many small banks will go under as a result.
are exposed to property, too. The good news is that the two biggest euro-zone
economies, France and Germany, have seen only modest declines in rents and
prices. But one of Italys biggest property companies, Risanamento, is
fighting to stave off its creditors. And pain is being felt all around the
periphery of the euro area. In Spain (see article) and Ireland vacancies are
surging, property prices are plummeting and cranes are standing idle.
Prices are plunging
across central and eastern Europe, too, although the volume of transactions
remains slim. Yields in many of these markets were driven down by hopes that
they would, in time, converge with those in mature European markets. Vacancy
rates in cities such as Budapest have surged to about 15% while those in Prague
have almost doubled (to roughly 10%) over the past year. Some of the biggest
falls in rents are taking place in Russia. Rents in Moscow have fallen by
63% in the 12 months to the end of June although they are still the third-highest
in Europe (after the West End in London, and Paris). With almost one-fifth
of office space empty, further falls in rents and prices seem likely.
Asia has not
been spared either. The worst-affected property markets in the region have
been financial centres such as Singapore and Hong Kong. Shrivelling bank balance-sheets
have meant shrinking demand for office space, as armies of bankers have lost
their jobs. Singapores swankiest business district led the retreat in
office rents across the region, shedding more than half between June 2008
and June 2009, according to Cushman & Wakefield, a consultancy. Hong Kong
was not far behind with a 43% drop in the same period. Mumbai (down by 40%)
and Shanghai (32%) were the next hardest hit.
There are some
signs that the speed of the downward adjustment is slowing. In Hong Kong,
office rents in the prime central district declined by 20.1% in the first
quarter. The fall was much more moderate, but still 10.4%, in the second.
Looking ahead, Singapore seems particularly dicey, because 8.3m square feet
(770,000 square metres) of new office space will be coming into the market
by 2013. According to CLSA, a broking firm, oversupply will also weigh heavily
on office property in China. Vacancy rates in Shanghai and Beijing could rise
to 35% in 2010 from around 17% and 22% respectively today.
A year ago everyone
was worried about losses on residential-property loans. If the latest data
are any guide, both American and British house prices may be finding a bottom.
Concerns are now switching to the commercial sector. History suggests downturns
in that market last for years, rather than months. Almost 20 years have passed
since the Japanese property market peaked. Prices still fell by 4.7% last
money and time saving tips:
Call for a mail order catalog. Sign for one on the web.
It will come with zillions of discount coupons.
+ Sign for the
retailers' credit card. Get a big discount. Pay off the card. Don't use it
+. Don't believe
the first quote. The local car dealer wanted $600. The local body shop wanted
$130. Shop around. Many businesses are upping their prices, in desperation.
Car maintenance places are copying doctors, adding on unnecessary services.
at high-end, classy stores, like Saks, are authorized to give discounts beyond
those already visible. Ask.
+ Always bargain.
+ Take an unlocked
GSM cell phone abroad and buy local prepaid SIM cards. (I'd lend you mind,
except Lucas is using it in Brazil.)
+ A Y-up full-fare
coach fare can get you an upgrade to first. Check.
new Bing.com lets you look for reduced airfares. It will save your searches
for seven days.
+ Don't stand
in economy lines. Request an upgrade. Go to business class counter "to
see if the upgrade went through."
+ Call the hotel
directly. Often they have better deals in person than on the Internet.
+ Stay at hotels
with free Wi-Fi. Use free ATMs.
+ Hiring a car
and driver can be cheaper than a rental in poorer countries.
The last few tips
from Travel and Leisure magazine.
Linksys Wireless Range Extender. A
marvelously useful device. This is it hanging on my wall.
What it is:
It extends and strengthens your Wi-Fi home or office network. My home network
read 30% at the part of the house farthest away from the router. When I plugged
this thing in, it went to 95%. I felt the speed increase. You can carry it with
you. Plug it outside and sit in your favorite hammock and surf the net.
How it "installs."
You plug it in next to your PC. You run the CD it comes with. That takes 30
seconds. It tells the gadget to become one with the network you already have.
Then you take it to your hammock. Plug it in. Hold the button on the side in
for five seconds. Within 30 seconds the two lights on the front turn to blue.
Bingo, you're hot to trot. Works like a charm.
Why I like
it: Portable. Easy to install. Cheap. Only $80.
Buy it from Amazon.
Sign for their credit card. Save $30, or 62%.
meaning. I figured the true meaning of life. I was packing the umpteenth
box of computer stuff, laptops, cables, shoes and other supplies to ship to
my son who has moved to Portland, Oregon,
You start in the
shipping department, progress up the ladder to be president. Then you progress
down the ladder and end up your career in the shipping department.
There is good
news in this. First, my packing skills have improved. Second, the quality of
the technology bubblewrap, polystyrene and Scotch packng tape
has improved. Third, theres genuine satisfaction at squeezing many items
into one found box. (You don't want to hear what UPS charges for empty boxes.)
a happy story from Afghanistan.
A large group of Taliban soldiers are moving down a road when they
hear a voice call from behind a sand-dune say, "One Marine is better than
The Taliban commander quickly sends 10 of his best soldiers over the dune whereupon
a gun-battle breaks out and continues for a few minutes, then silence.
The voice then
calls out, "One Marine is better than a hundred Taliban soldiers."
Furious, the Taliban
commander sends his next best 100 troops over the dune and instantly a huge
gun fight commences. After 10 minutes of battle, again silence.
The Marine voice
calls out, "One Marine is better than one thousand Taliban."
The enraged Taliban
commander musters a thousand fighters and sends them over the dune. Cannon,
rocket, and machine gun fire rings out as a huge battle is fought.
Finally one wounded Taliban fighter crawls back over the dune and with his dying
words tells his commander, "Don't send any more men, it's a trap. There
are two of them."
If you receive an email from the US Department of Health telling you not to
eat canned pork because of swine flu. .
Ignore it. It's
This column is about my personal search for the perfect
investment. I don't give investment advice. For that you have to be registered
with regulatory authorities, which I am not. I am a reporter and an investor.
I make my daily column -- Monday through Friday -- freely available for three
reasons: Writing is good for sorting things out in my brain. Second, the column
is research for a book I'm writing called "In Search of the Perfect
Investment." Third, I encourage my readers to send me their ideas,
concerns and experiences. That way we can all learn together. My email address
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