Risk Free Property Gains for the Chosen Few

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Last week I caught up with Phil Anderson, Editor of Cycles, Trends and Forecasts. We had a bite to eat near our office here in Albert Park.

I work from home mostly, and don’t normally come into the office. And I’m not a big fan of Albert Park, to be honest. Don’t get me wrong — it’s a beautiful suburb. But the vibe on Bridport Street is a little soulless.

Given Albert Park is one of the priciest postcodes in Melbourne (and therefore Australia) its lack of soul isn’t surprising. It’s laidback and languid, sure…but it’s lacking something.

That’s because the people who live here are rich, or striving to be ‘rich’. That is, they’ve run their race in life, they’ve ‘made it’. They are now enjoying the café lifestyle doing their cooling down stretches.

While pleasant, polite and inoffensive people, they feel insulated from the rest of us, and thankful for it. But this sense of security and seclusion comes at a price. It takes a piece of their soul away. You can feel it in the street.

It reminds me of what F. Scott Fitzgerald wrote in his short story, The Rich Boy:

Let me tell you about the very rich. They are different from you and me. They possess and enjoy early, and it does something to them, makes them soft where we are hard, and cynical where we are trustful, in a way that, unless you were born rich, it is very difficult to understand. They think, deep in their hearts, that they are better than we are because we had to discover the compensations and refuges of life for ourselves.’

Poignant stuff.

Umm, sorry, where was I?

Oh yeah. Lunch with Phil. We were talking about real estate. But not in the way other people talk about it. Phil knows how real estate really works.

I don’t. I stupidly thought real estate was just another asset class. I thought you should value it according to the principles of corporate finance. That is, capitalise its cashflows based on an appropriate risk-free rate, plus a risk premium.

That corporate finance course I did at Sydney Uni as part of a post-graduate degree was clearly a waste of time. And a waste of my youthful Saturdays, spent trying to get my brain to remember the equations of financial mathematics.

Anyway, Phil told me a story about the real estate market that I want to share. Because once you understand how this works, you’ll understand how property and land is inextricably entwined in the Australian psyche…from the top to the bottom.

You might also be surprised that we (as in Australian democracy) allow what you’re going to read to happen. But you shouldn’t be surprised. It’s been going on for decades.

Melbourne probably has the best form of any city in Australia on this front. Read The Land Boomers and you’ll know what I’m talking about. It chronicles the late 1800s land boom and bust in Melbourne. Needless to say, politicians were in the thick of it.

Here’s the first part of the story, as relayed by The Age:

In July 2012, then planning minister Matthew Guy stunned the political and property worlds when he rezoned a massive 250 hectares of low-rise industrial South Melbourne and Port Melbourne to “capital city”, effectively doubling the size of the Melbourne CBD.

It was the most contentious decision by a Victorian planning minister for decades.

The widely criticised move triggered a dramatic increase in land values and a development frenzy of 46 apartment towers – some reaching more than 60 storeys – that have been proposed or approved in the precinct since January 2014.

Let’s be clear here. Matthew Guy only stunned those in the political and property worlds that weren’t in on it.

There were plenty of others who weren’t stunned at all. The Age tells us who…

The biggest winners from the rezoning were those who already held property, or were in the process of buying into, Fishermans Bend.

Among them is Liberal party honorary treasurer Andrew Burnes, a close friend of former Federal treasurer Joe Hockey.

Another eyebrow-raising purchase at Fishermans Bend was by one-time Liberal activist and current BRW rich lister Harry Stamoulis, who was negotiating a $24 million purchase of a large industrial site in South Melbourne when Mr Guy rezoned the area in 2012.

Others with Liberal links had bought into the area years prior to the rezoning, but were active party donors around the period the boundaries were drawn and gazetted.

Auto dealer John Ayre is a member of a consortium proposing a $1 billion apartment complex on former Crown land at 150 Turner St and at 351 Ingles Street in Port Melbourne.

The first site was Crown land gifted to the group in 2003 and they paid a mere $1.5 million for the second site in the 1990s; agents now value them around $80 million.

Mr Ayre is a shareholder of ULR Automotive, which donated $25,000 to the Liberals in 2013. He personally donated $13,500 in 2013-2014.  

In the mid-1990s BRW rich lister and Liberal donor John Higgins paid $936,000 for a site at 297 Ingles Street that is now worth an estimated $15 million. He donated $25,000 to the Liberal party in 2013.

For some, property really is a risk free investment. This is how the game works folks. Or, as Phil told me, this is how the cycle turns. That is, rezoning bestows windfalls gains on the insiders. Developers then go to the banks and borrow to finance the purchase of the inflated price of rezoned land.

Finally, the individual takes out a (higher) loan to buy the apartment from the developer. If it’s at the right time in the cycle, the developer will make money. If it’s not, they’ll go bust.

And when the property market goes bust, the guys who made the big gains at the start of the cycle will come in and buy up the distressed assets. And they’ll wait for the cycle to turn again.

If you want to know where we are in the cycle, you can check out Phil’s work here.

Or, if you feel like you don’t have the capital (or the right connections) to get involved in the property game, I’ve got an idea for you.

It’s a stock that I think has all the makings of a ‘10-bagger’ opportunity. That is, you could turn $5,000 into $50,000. It’s an ugly stock right now, but all it needs is a few catalysts and it will start moving very quickly.

You can read my report on it here.


Greg Canavan,

For The Daily Reckoning

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Greg Canavan
Greg Canavan is the Managing Editor of The Daily Reckoning and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails. For more on Greg go here.

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