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Archive for August, 2011
More and more clients, both European and American, have been asking us about the debt crisis in the EU.
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Aside from wishing to do what I can to address their concerns, I´m extremely interested in this subject as Torcana holds a substantial amount of euros, dollars and British pounds. I also have personal savings and/or investments in Ireland, Spain and the UK.
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You can tie yourself in knots thinking about this though, as every economy is so closely tied to its trading partners.
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One of the options being floated is that Ireland should consider leaving the euro. This to me would be a disaster. If the Irish left the euro and converted back to the punt, the currency would depreciate rapidly against the euro. For simplicity, lets assume 1 euro = 2 punt. That would lead to an export boom, since overseas buyers could purchase Ireland’s goods for half the previous price. The flip side, is that everything you import is also twice as expensive.
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More importantly, Ireland would have to earn 2 billion punt for every 1 billion euro owed to the EU, the IMF and other international creditors. They could never hope to do that and Ireland would have no choice but to default on these debts. The bond markets would shun Ireland for years - would you lend to a person who already defaulted on previous loans?
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This would lead to a severe liquidity crisis as a huge number of businesses and individuals would wish to withdraw their money from Irish banks and deposit it elsewhere. Those who didn´t act quick enough would see the value of their savings wiped out as the punt depreciated even faster against the euro. Companies like Microsoft, Dell, Facebook, Ebay & Intel would all run for the hills, probably the hills of Poland.
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In other words, I cannot envisage any scenario that would see Ireland volunteering to leave the euro. There is far too much to lose.
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What happens if Germany goes?
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With Spanish, Italian and even French debt causing market jitters, a much bigger worry seems to be that Germany will cut its losses and leave the rest to fend for themselves.
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Looking at the bigger picture: if Germany leaves the euro and converted to dmarks, the dmark would appreciate rapidly against the euro (as a euro without Germany would be much weaker) and their exporters would suffer a lot. A strong export economy is very important to a country like Germany with comparatively low domestic demand.
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Additionally, the value of all the hundreds of billions of euro loans they´ve lent to other EU countries and banks would depreciate against the dmark. This double blow would be extraordinarily painful for the German economy and they would wish to avoid it at all costs.
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In the coming year, Germany´s choices may boil down to (a) leave the euro and suffer the consequences outlined above or (b) stay in the euro and use its strength to guarantee the debts of weaker EU economies. While they certainly don´t want to guarantee the debts of weaker EU economies, my feeling is that they will ultimately prefer to do this than suffer the consequences of leaving the euro or letting it fail. It is becoming increasingly obvious that hundreds of billions of euros will either need to be guaranteed or written off by third parties like Germany, and it will be an incredibly messy process.
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Nobody, not Germany, not France, not Holland, is going to guarantee the debts of Greece, Italy, Ireland, Spain etc. if there is the slightest chance they could simply spend their way into trouble again in 5 years time. In other words, they would insist that these countries hand over some of their power to tax and spend.
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Even if there was the political will to do this (which there isn´t), many countries would be constitutionally obliged to put this to their citizens via a referendum, which would almost certainly be rejected.
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If and when the cost of borrowing for Italy and Spain creeps up towards the 7% range, this will all come to a head (again). A way must be found for Germany & France to guarantee the (enormous) debts of these countries without putting their own finances at risk.
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This is definitely possible, as the overall EU debt as a percentage of GDP is a managable 88%, compared with 98% in the USA, 200% in Japan and 83% in the UK. The annual EU deficit would be approx 4% of GDP, far lower than the 10% in the US and 8.5% in the UK.
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At a time when the American congress is as polarized as it has ever been, it is worth noting that the Europeans have a certain genius for coming up with messy, drawn out compromises that get the job done.
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Colin Murphy, Director
Torcana.com
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Most buyers want to purchase at the lowest possible price. However, price must be balanced against quality. An inconsistent rental income and an uncertain exit strategy will quickly sour a deal that seemed too good to be true.
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In good times and in bad, the lowest prices will always be available in low income areas with poor transport links, low owner occupancy, high levels of foreclosures, high levels of delinquencies on community fees and lots of deferred maintenance.
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Chasing a low purchase price with a high rental yield is what I consider to be a “too good to be true” strategy. Your rental income isn´t going to be very reliable in these kinds of areas. Tenants here are less creditworthy, less responsible and more transient. This will lead to high vacancy periods, high management fees and high repair costs. Finding a profitable exit strategy for that kind of property five years time will be difficult if not impossible.
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The best investment locations, in good times and in bad, are those closest to the best schools, jobs and amenities where young families and professionals rent, live and buy property. For these reasons, they will never be the cheapest properties on the market, but they will certainly be the most stable.
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A person seeking a reliable rental income and a solid exit market should choose properties with the following characteristics:
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1. FHA financing available to owner occupiers
2. Low foreclosures levels
3. High owner occupancy and low vacancy levels
4. Low levels of delinquencies and deferred community maintenance
5. A satisfactory HOA reserve to cover future maintenance work
6. Close to quality schools and major employers
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Junk mail filter
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If you are receiving a dozen emails every week with deals that all look great - just ask the seller to confirm the above and you´ll very quickly find out which ones are duds.
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The six bullet points above are obvious, anybody could come up with them after a few minutes thought. The trick is finding properties that match these characteristics and securing them at a competitive price. That´s not so easy and not many people are doing it.
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There are different levels of risk in real estate, and plenty of ways to earn a living from it. Not everybody will agree with my take above. That´s ok - one size doesn´t fit all in this game.
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However, if you happen to agree with me that the most viable strategy is to buy in locations where people pay their rent and bills on time, where the amenities are well maintained, and where banks are already lending to owner occupiers, then you´re going to love our next product launch. See http://www.torcana.com/newsletter-41.htm for further details.
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Real Estate Gold?
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Gold is viewed as a safe alternative to government bonds and equities, and the price of gold is sky high as a result. Buying anything when prices are at record highs seems dubious to me, especially an asset like gold which produces zero income. I know one client who is doing the opposite - i.e. selling the gold he bought 5 years ago when it was just $600 an ounce (it´s over $1800 now).
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Why run to gold? Why not run to an asset class that has already been stripped down to record lows, that offers a regular income, has an intrinsic value and has consistently acted as a hedge against inflation? Real estate is looking very compelling at the moment.
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I discussed these issues in more detail on our previous newsletter:
http://www.torcana.com/newsletter-41.htm
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Riots in Britain, the USA losing its AAA status, emergency bilateral meetings in Europe in the middle of holiday season …. August isn´t usually this eventful is it? Let´s have a quick recap.
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On Friday 5th August Standard & Poor (S&P) downgraded America´s credit rating from AAA to AA+. On Monday 8th stock markets across the globe took a huge dive. On Wed 10th, the Fed Reserve announced that it would keep interest rates at virtually zero for another two years, producing even more schizophrenic reactions from the markets.
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Who´d want to be a trader in an environment like that?
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Witnessing these crazy reactions makes me very grateful to have time on my side. Torcana, and the majority of people reading this newsletter have a huge advantage over the professional money managers who are having minor heart attacks on a daily basis.
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Unlike them, ordinary investors don´t have to report to shareholders every quarter. They don´t have to engage in accounting trickery to make balance sheets look good. They don´t have to explain their every move or consider every action in terms of how it will be perceived by others.
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That makes a big difference over time. When professional money managers base their decisions on what might happen tomorrow or next week, an ordinary person can do very well by just staying calm and planning a year or two ahead.
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Personally, I don’t understand the violent reaction from the markets to the downgrade from AAA to AA+. No new information was released by S&P - they were just acting on what everybody knew already. It´s also crazy to think that the US was less credit worthy on August 5th than it was couple of weeks prior when politicians were flirting with a default.
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That being said, a stock market correction has been predicted for several months now. Markets have been too frothy for too long. Perhaps the protracted political bicketing over the debt ceiling and subsequent downgrade was simply the emotional trigger needed.
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Ironically, the market reaction to the downgrade of American debt has been to purchase ever more amounts of American debt. They won´t earn any income from these assets - the yield on a two year treasury bond is a miserly 0.19%. However, the money managers happen to be very worried this month and that means running away from risky assets and choosing the liquidity and safety of treasury bonds.
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Economists will say the market is rational - that´s a misleading way of putting it. A market will mirror the emotions of people within it, and they seem to be wildly emotional these days.
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I went on a fascinating scouting trip two weeks ago (late July). I hadn´t visited this country in about 5 years, so I was very keen to see how it had changed.
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This is the sixth most visited country in the world and tourism is growing at a breakneck pace. It is home to tens of millions of young and well educated people. It is the 9th largest recipient of foreign direct investment, well ahead of more hyped up rivals such as Brazil, Mexico and Thailand. It is the 15th largest economy in the world and the only big economy to have matched China and India´s eye watering double digit GDP growth figures last year.
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This country recovered very quickly from the financial crisis, and its banking system is extremely robust. In fact, Moody´s, Fitch and Standard & Poor have been quietly upgrading its credit rating, while generating headlines for doing the opposite to others.
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In its biggest city a property boom is in evidence everywhere. Thousands of new residential and commercial towers are springing up in practically every district. This is not Dubai - there is no speculative bubble driven by foreign investors. Demand is being driven by locals who want somewhere to live.
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Real estate prices in this balmy Mediterranean climate are less than half the price of similar properties in Spain, France or Italy.
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In my opinion, this is the most exciting real estate market in Europe by a mile. It is probably one of the hottest markets on the planet.
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The country I am referring to is Turkey - a democratic, secular, republic with an incomparably rich and ancient cultural heritage.
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With a population of 75 million and an average age of just 28, Turkey has become a major tourist destination with almost 30 million visitors a year (more than the UK).
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It´s economy expanded by 11% between Q1 2010 and Q1 2011, the third fastest in the world.
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Turkey is a prominent member of the G20, a long standing member of NATO (2nd only to the US in troop size) and is in full membership negotiations with the EU.
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Istanbul is one of the largest cities on earth, and with a population of over 13 million it is significantly bigger than both London & Paris. Despite its vast size, this is a magical place with an incredibly rich and exotic history, having been the centre of the Ottoman, Byzantine and Roman empires. Like Rome, Istanbul is perched on seven hills and you´ll find countless terraces and rooftops beckoning you to relax, beverage in hand, and admire the spectacular views of the harbor and famous Bosporus strait below.
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Istanbul skyline
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What surprised me most on this trip wasn´t how culturally rich Istanbul was. I was fully aware of that from previous visits. I was more taken aback by how modern and cosmopolitan the city had become.
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Let me illustrate by way of example from two of Turkey´s biggest passions – shopping and sport.
Example 1: Shopping
The main shopping street in Istanbul is called Istiklal. Picture a pedestrian version of 5th Avenue in New York or Oxford Street in London and you´re in the same ball park. Istiklal Avenue is lined with boutiques, cafes, consulates, restaurants, cinemas, banks, churches, mosques and high end residential apartments. Young girls wearing skimpy summer skirts and t-shirts mingled freely with older generations wearing a traditional headscarf.
Istiklal Avenue, Istanbul
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I was there at 10pm on a Wednesday evening and it was packed with shoppers. When I left my restaurant at 11.30pm, the streets were still busy and the shops were still doing brisk business.
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Example 2: Sport
Turkey is a football mad country and it has been playing professional football for well over 100 years (there are four professional leagues here, including a ladies one). The two most famous teams, Galatasaray and Fenerbache, are both from Istanbul. During my trip, I was fortunate enough to have been invited to join some local businessmen in their pitch side seats in Galatasaray´s brand new stadium. We watched a friendly pre season game between Galatasaray & Liverpool.
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Liverpool famously won the Champions League final in Istanbul in 2005, so their supporters have fond memories of this city. Choruses of “You´ll never walk alone” were ringing out loud and clear before the kick off. Unfortunately for them, they were totally and utterly drowned out once the game started and the crowd deservedly roared their approval before, during and after a convincing 3-0 victory over the former Kings of Europe. This was a “friendly” game but the atmosphere was as exciting as any I´ve experienced in the big stadiums of Spain and England. The ticket prices are also comparable, but that didn´t seem to deter the local supporters in the slightest - the 55,000 capacity stadium was packed.
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Galatasaray v Liverpool
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After the game, I travelled back into the city center with their boisterous supporters using an ultra modern (and air conditioned) metro system that puts London to shame.
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Turkish Real Estate Market
The purpose of my visit to Istanbul was to check out the local real estate deals. History, shopping and sport aside, the following is what I most like about Istanbul: it has a booming economy, a massive population of upwardly mobile young people, a huge gap between demand and supply, dozens of extremely large and cash rich construction groups and a host of banks keen to lend to both locals and foreigners at low interest rates and flexible terms.
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Demand for high quality rentals in Istanbul is huge and it is not unusual for rents to increase by 5-10% annually. I´ve read through independent market reports and believe investors can achieve net yields of 7-8%, with many promoters guaranteeing these rates for the first two years.
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In my view, better known real estate markets like Spain, Ireland, Italy and even the UK all look sluggish and overpriced when compared to Turkey.
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I visited eight different projects during my visit, most of which were located in well heeled neighborhoods to the north west of the historical city center. Some were fully complete, some were half way through their construction and others had barely started digging the foundations.
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One of the completed projects I visited
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Generally speaking, spacious 1-3 bedroom apartments can be purchased pre construction from just €65,000 / $90,000/ £55,000 and they would be worth significantly more on completion. Prices can be fixed in USD, GBP, EUR and Turkish Lira. A 30% deposit is placed after reservation and the remainder can be financed on completion from a range of local Turkish banks at a 6% interest rate over 15 years.
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I know of one company in particular who is expecting to disperse roughly 150 foreign mortgages in the next 6 weeks from overseas buyers. Once I verify that they were processed without any major hiccups or surprises, I´ll be getting very bullish on this market and will most likely offer a choice of several developments for investors to participate in.
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Prior to that, I´d like to invite approximately 50 investors to join our pre-launch list . These will be the first people to receive detailed information packs on Turkey, Istanbul and the first projects we will release.
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If you would like to join our pre launch list, just send an email to investments@torcana.com with Turkey in the subject line and please include your name and a daytime contact number.
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Kind Regards
Colin
In my previous newsletter, I outlined my thoughts on the EU/US crisis and why I felt business in Florida will carry on regardless.
Here are ten reasons why I am still betting on Florida real estate:
1. As of June 2011, there were 10,559 homes available to purchase in Orlando though the multiple listings system (MLS). This is 35% lower than the June 2010 inventory (16,304).
2. If you´re wondering why good deals seem harder to come by this year compared to last year, then look no further than the fact that Orlando condo inventory is down a dramatic 54% year on year. There are only a few hundred available to purchase.
3. The median sales price of a normal (i.e. non-foreclosed) property has increased an incredible 40% year on year, from $112,000 (£68,225) to $158,000 (£96,250). There has been a corresponding drop in the numbers of bank owned properties available in the open market.
4. The current pace of sales is equivalent to just 4.3 months supply, the lowest since 2005. A lot of prospective buyers will say that they are waiting for the bottom of the market. In my view they’ve already missed it.
5. One in five Canadians are interested in US property, according to a new survey by BMO Bank of Montreal. Aside from the Canadian dollar appreciating 18% against the greenback in the past five years, the house prices in the locations they tend to favor (Tampa, Phoenix, Miami) have fallen far faster than the US average.
6. Between March 2010 and March 2011, almost a third of all Florida sales were to foreign buyers, up from 10% in 2007 (NAR). Generally speaking, the USA is still by far and away the largest recipient of foreign direct investment.
7. Orlando´s median home price (which is a good barometer for Florida as a whole) is now $94,950 (£57,850), the lowest level since 1997. Reserve at James Island units are available at this exact price, but I can assure you the quality and location is far above the average.
8. According to a recent report from the Harvey University Center for Housing Studies, 16 million new housing units will be needed to meet population growth and shifting demands. That would mean household formation, currently at 500,000 per year, will need to reverse its recent trend and get back to the 1,000,000+ per year we witnessed in the years previous to the financial crisis.
9. There is going to be a surge in demand for smaller homes, as an estimated 3.8 million baby boomers will be looking to downsize in the next decade. There are an estimated 50 million baby boomers in total and a disproportionate number of these will be attracted to the warm climate, low cost of living and quality of life of Florida. Immigration growth will also continue to stimulate demand.
10. Despite all the turmoil in the markets, there can be few who doubt that Florida is a diverse, wealthy and resilient economy with a safe and secure legal system that has been protecting foreign buyers for decades.
Kind Regards
Colin
