World Out Of Whack: What’s Next For Global Real Estate?

As investors we’re interested in viewing real estate as we would any investment or asset, and as such understanding the cashflows is important. Naturally, incomes relative to asset prices tell us what the owner’s cashflows are relative to the asset they’ve buying… and the same analysis can be conducted against student loans, car loans – any credit instrument, really.

Here’s rents (cashflows) relative to asset prices:

Oy vey! There’s enough there to make your hair stand on end.

What do you think the cashflows on this baby are like?

I wonder if it comes with free tetanus shots?

Spotting bublicious markets is one thing but it’s quite another identifying turning points and then another altogether finding a means of constructing an asymmetric payoff.

Here’s a question to ask yourself:

What happens when cap rates go from 4 to 6 as in the US and from 5 to 8 in a place like New Zealand? I think we’re going to find out over the next few years.

Napkin Math

Let’s do the math…

We’ll keep the numbers dead simple. It’s the same math as looking at the market cap of a company and its dividend yield and free cashflows.

So we’ve got an asset, a commercial building someplace priced at $1m with a 4% cap rate, thus yielding $40k, and let’s assume financing costs at, say, 4%. Now this mythical building could be in Toronto, London, Sydney, or Auckland. And yes, I know financing rates and cap rates differ across town let alone across countries but it doesn’t matter – the same principles apply.

Now, for the guy owning this asset he’s either:

  1. Levered and using the $40k to service debt, or…
  2. He’s simply allocating capital and the 4 cap rate was more attractive than the 2 he’d get on a CD.

You may ask yourself the question: Why on earth would an investor buy a 4 cap asset in an environment where financing costs are 4%?

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Disclosure: None.

Disclaimer: This site is not intended to render investment advice.None of the principles of Capex Administrative Ltd or Chris MacIntosh are licensed as financial professionals, ...

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