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| Issue 28: Making sense of the global economy |
Torcana Ltd
July 2010 |
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Good afternoon Colin,
Every ten issues or so, I feel compelled to write a longer and more general note describing economic shifts and events (as I see them) rather than the usual focus on property and property markets.
There is still a lot of uncertainty and misinformation out there regarding the EU currency crisis, the massive US debts and how these impact property investment decisions.
I do realise of course that not everybody will be interested in my views on these issues! Please feel free to skip straight to the property investment information by clicking on the links to your right.
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 Making sense of the jargon
Like many of our readers, I'm the type of person who tunes in regularly to radio chat shows, current affairs programs, newspaper  reports and financial magazines.
I do my best to keep on top of how the global turbulence is affecting our governments, our house prices, our labour markets, our stock markets and our changing consumption habits.
There are lots of commentators out there who seem very qualified and sound like they know what they're talking about when discussing concepts like recapitalisation, debts, deficits & credit ratings and yet, with a few notable exceptions, when I've finished listening to them, I've usually forgotten what the question they were supposed to be answering was.
Sound familiar?
With that in mind, and throwing caution to the wind, I'm going to pose a few short questions I think a lot of people would like answered, and I'll try and do as quickly and clearly as possible.
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Why is everybody talking about Government debts and deficits all of a sudden?
A government's debt is simply the total amount a country owes to its borrowers and the total amount owed is often expressed as a percentage of GDP (the size of its economy).
Governments usually borrow money by issuing a bond, which are mostly bought and traded by banks and investment funds. If it is a 10 year bond, the country pays a fixed interest rate to the bond holders every six months and then pays back the principle after 10 years.
For example, let´s say a 10 year old country with a €100 million economy has been borrowing €10 million every year. It´s total debt will be €100 million, which is 100% of its GDP.
Greece has been making headlines lately because its debt has reached 113% of GDP, which is one of the highest in the world and almost double the 60% limit imposed (in theory!) by the EU.
Government Deficit & EU Crisis
You could be forgiven for thinking a government deficit is something weird and complicated, but it´s not at all. It is simply the difference between what a country earns and what it spends in a fiscal year.
For example, let´s say Country A earns €100 million in 2009 from taxes collected and profits on government funds. During that year it also spends €110 million in health, education, defence and other public services. Its deficit is €10 million or 10% of its GDP that year.
The fact that pretty much all countries in the EU not just broke but tore up their own rules regarding debt limits (60% of GDP) and deficit limits (3% of GDP) has caused all manner of jitters in the financial markets this year.
Greece was the worst offender overall in 2009 (debt 113% and deficit 13.6%) although countries like Italy had a higher debt ratio (115%) and Ireland had a higher deficit ratio (14.6%).
So there are 16 countries in the eurozone all using the same currency, but they have very different levels of debts, deficits, unemployment levels and recovery measures. That worries people.
The same could be said for the USA (Texas is quite healthy, California is certainly not). Of course, this overlooks the fact that the USA is a single political entity whereas the EU is anything but.
A US President is quite restricted in domestic and economic policy though. Republicans don´t want to increase taxes and Democrats don´t want to decrease services.
Messy compromises in both Brussels and Washington then!
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What happens when a goverment borrows too much?
"Too much" is a very vague term. It would be more accurate to say "What happens when people don´t want to purchase government bonds anymore". However, if a debt or a deficit is perceived to be too high, a country needs to borrow less, spend less and/or grow more. These are very difficult options.
For Ireland this meant higher income taxes, higher VAT, lower public salaries, higher retirement ages, lower capital spending and less state support for the elderly and children. Tough medicine to be sure, but I´m proud to say we had the stomach for it, unlike lots of other (mostly Mediterranean) countries that should be taking similar measures.
France is a good example. There was a massive public uproar recently when the retirement age was increased ... to 63 years ....in small increments between now and 2018. They´re getting no sympathy from me.
Germany, on the other hand didn´t need to do anything nearly as extreme as the Irish because they are a conservative and prudent economy with low wages and high productivity. Between 2001-2006 they were drinking diet cokes while the Irish, French, British and Spanish were downing straight whiskies and margaritas. Their finances were fine and thanks to their awesome economy they can grow their way out of a recession a lot quicker than everybody else.
These are among the reasons we´ve started promoting multi tenanted German properties in key locations.
Send me an email if you´d like to learn more.
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What opportunities does this provide in the property markets?
Firstly, thank you to those who have gotten this far though our newsletter! Secondly, and harsh as it may sound, there are several ways those who are still liquid can profitably take advantage of a global downturn which is still causing much suffering to others 3 years after the credit crunch began.
One of these ways, which Torcana identified more than two years ago, is to purchase highly discounted and undervalued properties from distressed sellers. To maximise the return and minimise the risk of these types of properties, they must be purchased
- in wealthy, democratic economies
- with a history of renewal and recovery from recessions
- in fundamentally sound cities and neighbourhoods
- where locals rent long term
- where locals have and are currently purchasing these properties
Apart from that, the properties must be fully completed, cashflow positive and in well located and well run buildings or communities.
I´m sure there are plenty of other types of properties that can make you a healthy profit, but these are the ones we´ve identified with the best risk/reward ratio. It´s difficult to see how these kinds of properties will give any serious problems over the next 5 years and the potential benefits are huge.
So our criteria is very strict, but we´ve found plenty of properties that tick all these boxes and the latest is Arbor Lakes in Orlando. Here you can buy for 30 cents on the dollar in a beautiful and pre tenanted condo with 7-9% net rental yields.
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Long term property trends
For people that purchased property in the USA between 2003-2007 it´s been a pretty disastrous 3 years. Don´t think anybody will disagree with that.
What about the people that bought in 1980 or 1990 or 2000? As the chart below illustrates, they are looking just fine. The red line is property prices adjusted for inflation every year and the blue line is average property prices in each of those years.
What about the people purchasing today at the 2001 prices? Where will they be in 10, 20 or 30 years?
Buying at historical lows means the rental yields will be high and once financing becomes available the supply of buyers (and property prices) will increase dramatically. If you purchase in 2010 at 2001 prices and sell in 2015 at 2005 prices, you´ve more than doubled your money.
However, the longer term view will depend a lot on interest rates and inflation too.
Unlike the Greeks, the US government can inflate its way out of trouble. Whatever your opinion is of the US debt (53% of GDP by the way), it´s ability to borrow is greater than any other country on the planet thanks to the unique status of the dollar.
Borrowing levels will have to stabilise though, and although there are lots of ways of doing that (some painful, others problematic) inflation is going to be a side effect.
If inflation does take hold in the US, that means interest rates will go up, which means higher mortgage payments for people. That´s not good if you have a mortgage.
Historically, that has also lead to higher rents.
It has also led to higher property prices.
So where will that leave the proud owners of distressed Florida properties with no mortgages in solid locations with steady renters?
Laughing probably, all the way to the bank.
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Arbor Lakes, Orlando, Florida
About Arbor Lakes, Orlando
Located just 20 minutes from downtown Orlando and two minutes from the Interstate 4, the area hosts an abundance of employment, excellent schools and easy access to the rest of Central Florida. It is a much sought after location for young families and professionals and the biannual rankings of CNN/Money Magazine in 2008 ranked Lake Mary as the 4th best town in America and number 1 in Florida to live.
Investment Summary
Location - Two minutes from the I4 in one of Orlando´s most beautiful communities
Unit Types - Selection of 1, 2 and 3 bed properties
Unit Sizes - 1 beds (884 sqft), 2 beds (1160 sqft), 3 beds (1337 sqft)
Price range - From $64,500 (€52,500 / £43,250) to $99,000 ($81,000 / £66,400)
Occupancy - Achieving almost full occupancy, which speaks volumes for the quality of the community
Rental Yields - Net yields are as high as 9% although most are in the 7-8% range
Facilities - Pools, tennis, bbq areas, fountains, playground, sports bar, lakes, gardens & jacuzzis
Features - Terraces, 9-foot ceilings, appliances, alarms, pantry, marble counters, walk in closets
Investment Type - Completely hassle free investment with full aftersales service
For further information including brochure, floorplans, location map and the latest price/availability list, you can either click here and complete our short enquiry form or just reply to this email.
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Dusseldorf/Krefeld - From €50,000 / $61,000 / £41,750
An opportunity to purchase two complementary properties containing an excellent mix of 17 retail, medical and residential tenants in two major German cities.
Rental yield is 7.11% with expected increase to 7.9% in 2011 and 65% financing has been secured. Minimum investment is €50,000 and expected 5-7 year returns are 66-96%.
The larger property is a REWE supermarket (Germany´s 2nd largest chain), with apartments overhead and a separate small block of apartments at the rear. The second property is a medical centre in Dusseldorf containing a pharmacy and 3 medical suites, each occupying one full floor.
The average cost per sq ft of the properties is €80 in Krefeld and €174 in Dusseldorf, both of which are a fraction of the site plus build cost today.
The total investor equity needed is €1,090,000 and the total finance available is €2,060,000 (65%). Total annual rental income is approx €223,965 (€18,664 per month).
This investment is now 90% subscribed with just €113,300 ($140,000) is needed to complete. This will be allocated to a Torcana investor (or two) on a strictly first come first served basis.
It is expected that a €100,000 investment in 2010 will return approx €166,000 - €196,000 on exit in 2015-2017.
For further information please click here and complete the short enquiry form.
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About Us
Torcana is a Dublin & Florida based investment specialist which promotes a variety of real estate and renewable energy investments in Germany, Florida and the UK.
We focus only on completed, cashflow positive, high quality assets with solid management and a clear resale market in place.
(C) Torcana Ltd 2010
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Contact Us
Ireland: 14 Pembroke Cottages, Dundrum, Dublin 14
USA: 7087 Grand National Drive, Suite 100, Orlando Florida 32819
Ireland: +353 1 4433 991
USA: +1 321 806 1195
UK: +44 207 193 4024
Skype: torcanaltd
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