Realty – TurnerStreet

February 15, 2024 PPD1962 Debt|Equities|Realty

EQUITIES: are American banks a concern?

QUESTION: Property is in a hole, interest rates are going up and we have crazies in control (or not in control) of parts of the US government, so are you concerned about US banks?

ANSWER: Yes.

Maintaining bank stock multiples is about confidence and there is a lot to be concerned about in the US:

recent political activity (border and military bills) suggests that Republicans would now generate a real crisis if it damaged the Democrats’ prospects in this year’s elections, and causing a debt crisis is the biggest possible crisis (although some think it would blow back on the Republicans);
interest rates aren’t going down, and likely to go up, this year due to low unemployment and higher inflation;
property defaults are going to happen;
the US government needs to get debt levels down and it isn’t going to happen without structural reforms; and, finally,
unlike most banks in OECD countries, the US runs theirs on socialist principles with respect to house mortgages but free-enterprise principles for bank executive remuneration, and this creates a moral hazard that eventually governments will not want to continue funding!

The bottom line is that US banks will need more capital over time. Although some US banks are better than others, it is difficult to justify any except Morgan Stanley.

Contact TurnerStreet if you wish to buy our current asset allocation recommendation (we do cash and equity only allocations for our wholesale clients), and the list of the stocks TurnerStreet would buy for a typical wholesale client, or if you would like TurnerStreet to manage your equities and derivatives portfolio.

IMPORTANT: This Q&A is general product advice for wholesale or sophisticated investors, and NOT suitable for retail investors. Retail investors should seek advice specific to their circumstances and not rely upon general product advice written for other types of investors. Retail investors acting like wholesale/sophisticated investor are likely to experience inappropriate and/or excessive risk for their circumstances, and unacceptable losses.

December 28, 2023January 1, 2024 PPD1962 Realty

REALTY: tips for the DIY investors

QUESTION: Previously, you said TSA only does cash and equities portfolios, but that you would provide some tips for DIY property investors, so what are they?

ANSWER: Firstly, it is worth noting that despite realty being the largest asset class for most investors, it remains largely unregulated in most countries. For example in Australia, you don’t need a licence to advise someone to borrow $4.5m and buy a $5m house. However, you do need a licence to tell the same person to use $500 of cash they already have to buy $500.00 of stock: crazy but that demonstrates the vested interests in real property by real estate agents and banks/financiers.

(Note: in Australia property is taxed differently depending on whether it is the owners principle residence. Surprisingly, real estate agents and banks/financiers are also willing to give tax advice despite not being qualified).

Here are some tips, that may, or may not, suit your DIY plans:

buy freehold property rather than lease hold or strata because there is more development potential;
buy property close to government run transport, preferably trains, trams and ferries (buses less so);
never tell a real estate agent (they want to maximise their commission and they work for the vendor) what your budget, financing arrangements, property us, etc will be: they are not your friends so err on the side of less information;
assume the rental potential of the property is lower than the real estate tells you;
do the buy v. rent analysis if you are going to be an owner-occupier;
never offer a price to buy before auction or expression of interests close unless you know the vendor is in distress and will take a very low price;
buy, or get your mortgage broker, to give you all there recently settled property transactions in the area so you don’t need to rely on the potentially dishonest or selective information by the real estate agent (who works for the vendor);
always add 50% to any building work you estimate a property may need;
don’t bid at auction unless the property is on the market (if you aren’t sure ask during the auction);
if you are the highest bidder, don’t start to bid against yourself at an auction (this should be obvious, but it is now rampant in Sydney);and, finally,
buyers have to try to be as unemotional as possible, it is also necessary to be an unemotional seller!

Realty is unique and its uses can be various, depending on who owns it, so it is something that requires on-the-ground research. It is a task an investor or owner/occupier must do separately on each property. In our home town, Sydney, it is one-day a week task to buy or sell. Good luck.

IMPORTANT: This Q&A is general product advice for wholesale or sophisticated investors, and NOT suitable for retail investors. Retail investors should seek advice specific to their circumstances and not rely upon general product advice written for other types of investors. Retail investors acting like wholesale/sophisticated investor are likely to experience inappropriate and/or excessive risk for their circumstances, and unacceptable losses.

December 27, 2023 PPD1962 Asset Allocation|Cash|Debt|Equities|Realty

Debt: why equities folks follow it.

QUESTION: TSA do asset allocation only between cash and equities portfolios, so why are you interested in government debt?

ANSWER: Like it, or not, most investments are based off US Treasuries, so we need to abreast of what is happening. Recently, there was a good article that we would direct you to for an update: see this link. The US Treasuries are often used for the risk-free rate, which helps us determine the value of equities and their alternatives.

However, given the political instability in the US, maybe it will not be the risk-free rate in the future that investment managers use. Ironically, there is a significant proportion of the 74m of Americans who voted for Trump in 2020 who would prefer Trump over democracy. That is a huge number and the risk is that those Trump supporters have filtered into all elements of society: the Supreme Court; lower court; Congress; local election officials; et al. If that sounds familiar, think of Hungary, Turkey and Poland.

Finally, although TSA limits itself to cash and equities, we also like realty, specifically freehold land where the investor has local knowledge. However, most TSA clients already do land investing themselves, so we cannot add value, except to recommend freehold over leasehold or strata property (we will expand on that later).

IMPORTANT: This Q&A is general product advice for wholesale or sophisticated investors, and NOT suitable for retail investors. Retail investors should seek advice specific to their circumstances and not rely upon general product advice written for other types of investors. Retail investors acting like wholesale/sophisticated investor are likely to experience inappropriate and/or excessive risk for their circumstances, and unacceptable losses.

AA: debt markets can drive equities and other markets

QUESTION: the New York Times is concerned enough by the bond market to write an article on the matter, so are you concerned too?

ANSWER: yes.

Again, Finance 101 says that an asset is worth its cashflows in perpetuity, discounted by an appropriate rate. The appropriate rate is almost always related to the 10-year US Treasuries, who when their yields go up, valuations go down! Why, and how far, yields rise or fall is subject to lots of analysis by pseudo-scientists (also known as economists and chartists). It is fair to say that with lots of government debt to refinance, political pressure, a great economic resurgence, low unemployment, on the balance of probabilities, US yields are likely to rise. How much is debatable, but for anyone older than 60, another 1% would be at the lower end of expectations.

ACTION PLAN:

Firstly, if you can’t value an asset, including equities, by discounted cash flow, you are just punting securities, derivatives, etc, rather than investing. You should get a licensed investment manager.
The most significant means to increasing your wealth is getting the asset allocation correct. For most people, that means knowing when to put money into equities, bonds, et al and when to take it out. The first thing you need to ask your investment manager (or yourself if you take the DIY route) is what is the expected 10-year US Treasury yield and the percentage of a portfolio that should be equities, bonds, realty or cash (the other asset classes are so speculative, they should be only for the very brave).
Once you establish how much to allocate to each class, then it is a question of which security or property in each class to buy. For the DIY folks, that will most likely be an index. For professional investment managers, it will buying individual stocks, bonds and realty.
Contact TurnerStreet if you wish to buy our current asset allocation recommendation, and the list of the stocks TurnerStreet would buy for a typical wholesale client, or if you would like TurnerStreet to manage your equities and derivatives portfolio.

IMPORTANT: This Q&A is general product advice for wholesale or sophisticated investors, and NOT suitable for retail investors. Retail investors should seek advice specific to their circumstances and not rely upon general product advice written for other types of investors. Retail investors acting like wholesale/sophisticated investor are likely to experience inappropriate and/or excessive risk for their circumstances, and unacceptable losses.

Equities: fear in markets?

QUESTION: why fear is spreading in financial markets?

ANSWER: The Economist, and TurnerStreet, agree it is because of the long-haul reality of high interest rates.

At a recent investment conference TurnerStreet attended, all the speakers, except one, thought it may be late 2024 or 2025 before interest rates start to fall again. However, thinking about want truly is normal for interest rates, shouldn’t interest rates continue to increase by 2-3%? If correct, then the tide is going out for all the financial markets for some time. The best game in equities would then be to seek “alpha” and to hedge the “beta”.

ACTION PLAN:

Firstly, if you have never heard of alpha and beta before reading this article or understand what it signifies, you are just punting securities, derivatives, etc, rather than investing. You should get a licensed investment manager.
The most significant means to increasing your wealth is getting the asset allocation correct. For most people, that means knowing when to put money into equities, bonds, et al and when to take it out. The first thing you need to ask your investment manager (or yourself if you take the DIY route) is what percentage of my portfolio should be equities, bonds, realty or cash (the other asset classes are so speculative, they should be only for the very brave).
Once you establish how much to allocate to each class, then it is a question of which security or property in each class to buy. For the DIY folks, that will most likely be an index. For professional investment managers, it will buying individual stocks, bonds and realty.
Contact TurnerStreet if you wish to buy our current asset allocation recommendation, and the list of the stocks TurnerStreet would buy for a typical wholesale client, or if you would like TurnerStreet to manage your equities and derivatives portfolio.

IMPORTANT: This Q&A is general product advice for wholesale or sophisticated investors, and NOT suitable for retail investors. Retail investors should seek advice specific to their circumstances and not rely upon general product advice written for other types of investors. Retail investors acting like wholesale/sophisticated investor are likely to experience inappropriate and/or excessive risk for their circumstances, and unacceptable losses.

May 8, 2023May 8, 2023 PPD1962 Equities|Realty|Uncategorized

Realty: is Australian residential property worth buying?

QUESTION: should an investor buy Australian residential property?

ANSWER: probably not.

Damien Klassen, who is one of the few analysts who does the numbers on Australian property (rather than just saying it will keep going up forever so it is always a buy), wrote a terrific article on affordability Essentially, property is either extremely unaffordable (the mortgage cliff is coming) or we are looking at a global recession: neither will deliver stellar returns for investors in the medium term.

Interesting, while the government regulator in Australia, ASIC, requires entities like us, and Mr Klassen, to be licensed to advise on equities, any body can give unlicensed advice on property. In fact, buyers normally hear from agents (employed by the vendors) that property is going up: no qualifications and no explicit disclosure of how much they are earning in spruiking properties.

March 2, 2023March 2, 2023 PPD1962 Debt|Private Equity|Realty|Uncategorized

REALTY: nobody told Blackstone you can’t lose money on property

In a stunning, and not the first this year, Blackstone is defaulting on a property backed bond it issued: see here.

Investors should note if that with interest rates rising, still, there will in more defaults associated with property investments. Offices are difficult to repurpose into residential, so don’t try to “catch the falling knife”.

Cash is still king.

January 11, 2023 PPD1962 Equities|Realty

Property: buy office REITs for housing exposure?

QUESTION: The Economist wrote an interesting article about offices being converted to resident…is there a real estate investment trust (“REIT”) opportunity?

ANSWER: No.

There is no doubt that a small proportion of office buildings would make terrific homes, but a REIT is likely to have far more office buildings that would be poor conversions. The economics of buying an office building and knocking it down to build residential may work on certain streets in the world (e.g. Central Park South or something that is directly opposite Sydney Harbour), but generally it doesn’t.

December 26, 2022December 26, 2022 PPD1962 Alternatives (really weird stuff)|Debt|Equities|Private Equity|Realty

ESG: why don’t you intend to offer a product?

Question: if the world’s largest asset manager, Blackrock (BlackRock’s Pitch for Socially Conscious Investing Antagonizes All Sides – The New York Times), does environmental, social and governance (“ESG”) for investors, why won’t TurnerStreet?

Answer: ESG means different things to different investors (e.g. is nuclear green?), and what we think determines to be ESG responsible might not suit a particular client.

Hence, TurnerStreet’s product design is about the investor-client telling us what they want excluded from the performance benchmark for ESG reasons. With technological advances it is straight forwward, and relatively cheap, to have a client specific benchmark. This makes it possible to measure our worth as an investment manager, and for the client to quantify the cost of their ESG decisions against a traditional benchmark.

Blackrock can tell clients what are ESG investments, but we aren’t as presumptuous.

AA is sometimes drive by tax strategies

Question: Is this true (How Ordinary Americans Can Also Buy, Borrow, And Die Without Paying Taxes)?

Answer: Yes. The asset allocation (“AA”)decision, the most important in investing, is often driven by expected returns and risks of various asset classes. However, if you are wealthy it is often driven by tax. The “buy, borrow, and die with paying taxes” strategy will shift AA.