I’ve been interested lately in the shift of capital due to lower and lower interest rates. As is always the case, low interest rate policy shows first in investments that spew regular and positive cash flow.
Should it be any surprise REITs, real estate, and (to an extent) dividend stocks have been smashing the market?
Earlier this year I myself explored the prospect of leveraging P2P loans with brokerage margin, an idea that still finds itself bouncing around in my head every so often. I’m not even so much that friendly with leverage. I mean I am in the sense that I’m more levered than your average PF blogger, but that’s a different scale – always levered Wall Street is killing me here.
Earlier this year I wrote my own prediction for commercial real estate, suggesting that a decline in office space demand would bring about an eventual shift from commercial to residential properties.
Reality decided to come around to the delusions in my own mind. No, commercial real estate developments aren’t yet being converted to residential property. However, commercial real estate firms are ditching commercial for residential development.
The Wall Street Journal reported names like Boston Properties Inc., Mack-Cali Realty Corp., and Simon Property Group, have each acquired land, broken ground, or completed new residential property developments.
The same article noted a few statistics on apartments as a real estate investment:
- National vacancy rates run at 5.6%, down from 7.1% in the prior year.
- Rents rose 2.4% in the past 12 months.
Who wouldn’t want to be invested in cash flow positive real estate against the backdrop of European Debt Crisis?
It’s not like it’s a bad business. The Commerce Department reported a 25.3% improvement in multi-family housing starts in November.
Party like it’s 2005! Not only is Uncle Sam subsidizing developers by keeping 250,000 homes off the market, but my boy Bernanke is keeping rates so low even brand new real estate makes absolute perfect sense!
Speaking of cash flow, how about those corn fields?
Word on the street here is that hedge funds are actively involved in my local real estate market. Farmland is the new hot commodity as investors embrace cash flow and higher food prices. Om nom nom.
The boom is most certainly hot. In a recent article a Wells Fargo economist noted that farmland that once sold for 4 years’ revenue now sells for 6 years’ revenues. Reuters reports that farmland gained 25% in the November 2010 to November 2011 period. Nebraskan farmland was the hottest area for investment, with prices up some 40% year over year.
The benefit is multivariate; margins less capital expenditures for land are up considerably as food prices trend higher. But even still, it takes really cheap money to buy unimproved land in the United States, as the tax code does not allow for depreciation of land, a benefit most real estate investors enjoy tremendously on land improvements.
Wall Street Next?
I remain bullish on equities due to the same catalysts behind the boom in multi-family real estate and corn fields: money is cheap.
I still believe stocks are cheap – so cheap that CEOs of growth firms will start buying up other companies with leverage to keep up the growth stories. Of course, Wall Street didn’t provide nearly the same returns as residential real estate or farmland this year. I guess we’re now relatively undervalued?
Meh, probably not. Investors who run scared always run to cash flow.
I find it annoying; it’s the anti-thesis of low rates. Sure, present cash flows are great, but how about compounded future cash flows in a buyout? Nope. Still not getting the attention of investors? Okay – I’ll keep waiting. I never liked dividends anyway.
Seriously, our man Bernanke has never made a better case for debt-based investments. Granted, many people have a natural philosophical aversion to debt that won’t be shaken any time soon. I see no sense in trying to convert you if that happens to be your preference. But for the love of all things holy, the current environment is throwing mad money into cash flow positive investments to an extent we haven’t seen in a very long time.
Debt makes a disgusting amount of sense.
Anyone thinking about leveraging before the calendars are switched to 2012?
Photo by: klallier