Take your mind to the Wild West of American yore. The dusty plains stretch out as far as the eye can see. Wagons and horses make their way along narrow trails. Pioneers are heading West in search of better lands.
The race is on to get the best sites before somebody else does!
Fast forward to today. The wagons and silver coins have been replaced with digital millions and dark cars. But the mentality is the same. It’s a land rush all over the world.
You already know about the Chinese buying up property all across Australia, Canada and the US. But even their old nemesis Japan is getting a run.
Early last month Bloomberg reported that Beijing realty agencies are running tours to Tokyo and Osaka twice a month. Chinese buyers go shopping for their next property deal.
According to Bloomberg, they’re seeking a safe place for their cash, and expect the Tokyo Olympics to drive up real estate values like they did in Beijing in 2008.
How’s this for a quote, ‘The demand is like water exploding up from a well.’That’s from Zhou Yinan, an Osaka-based agent.
But it’s unfair to pick on the Chinese. Japan is not even the best example. London is right now. The latest figures from property advisor CBRE show that buyers spent £1.8 billion on land in central London in the second quarter of 2015.
That’s up 118% year on year, and now is back to the level it was in 2007. Approximately three-quarters of the money is from overseas. Apparently Australia’s not the only country flogging off its asset base and slowly undermining its national sovereignty.
Quite a lot of the money heading into the UK appears to be North American. There are some big bets being placed.
The Wall Street Journal reported recently on US private equity firm Lone Star Funds US$1 billion acquisition of Quintain Estates & Development.
That’s at a 22% premium to its current stock price too. Quintain owns the land around the storied Wembley Stadium. The Financial Times sums up the UK like this:
‘Cash from around the world has been flooding into the property market in a bid to benefit from the returns it can generate.
‘Although prices and yields for top-quality assets are back near pre-credit crunch levels, the sector is still generating better returns than most other asset classes, such as stocks and bonds.’
That’s certainly true. The UK’s Office of National Statistics says rents in London are up 3.8% year on year. That’s compared to 0.8% in Wales and even less in the north of England.
3.8% may not immediately strike you as a lot. But you have to remember the movement in the official consumer price index was officially zero in the same timeframe.
But what’s good for property investors isn’t so great for tenants. The expense of living in London — housing mainly — is pushing some young Brits to cheaper alternatives, especially Berlin.
It’s a bit hard to tell from here in Melbourne, but from what I can gather Berlin is currently the coolest city in the Eurozone. It’s hip. It has culture. It has jobs, especially startups. It has wonderful food and good beer. Most of all, it has cheap rent.
The Guardian ran a story last week and said the number of Britons now living in Berlin was up 35% from 2013 to 2014.
‘According to Numbeo, the online cost-of-living database, you can maintain the same standard of living in Berlin (£2,177) for half the price of London (£4,200), assuming that you rent in both cities. The consumer prices in Berlin are 30% less, and the rental costs are almost 70% lower than in the UK’s capital.’
One wonders how long that can last. Berlin is showing no signs of slowing down in terms of size. Its population is 3.5 million and has been growing for 10 years. Apparently it’s now even more popular than Rome with the tourists.
German authorities passed rent controls in March to limit the rise in prices and help tenants. Rents can’t rise any more than 10% above local averages in areas that have housing shortages.
Berlin is the only city to have acted on this law, however, presumably because of the pressure on its rental market. But now Berlin is not alone.
This issue won’t go away no matter where you live. The landlords of Paris are planning a legal stoush with French authorities after rent controls were enacted in the city.
From August 1, any new lease signed must not have rents 20% above or 30% below the median price for the area. Rents are said to be up 40% over the last decade.
Of course, price controls like this never work. They’re fighting an irrepressible force. Price controls always distort and deter genuine investment. But note how almost no one understand the real economics behind all of this.
The economic rent — the land price — is designed to increase, and it’s a good thing. It’s a freebie that the whole of society could benefit from. But no one sees it.
And because of this we have to pass laws to try and counter too much of it going into private hands. Hence the complexity of today’s laws.
Why bring this up?
As an investor, it’s easy to be misled into thinking the world is on the brink of a recession or major downturn. But those that are calling for such an outcome might like to wonder why land prices are rising so strongly in the first place.
But they don’t answer it, because they don’t consider the question. Hence why they’ll be proven wrong. You can put yourself ahead of the pack here.
For The Daily Reckoning, Australia