That’s an easy one to answer. Property. Commercial investment property, to be precise.
This won’t be news to you. The mainstream press has covered plenty of ground on this in recent weeks and months. Most recently, the Australian Financial Review listed about forty investment trusts that had closed the door on fund withdrawals.
Not only was the property market softening last year, but the decision by the federal government to introduce the bank guarantee caused a massive increase in the number of people wanting to withdraw funds from mortgage trusts and other funds that weren’t covered by the guarantee.
Confirmation of just how serious an impact this has been on the commercial real estate sector is the massive fall in the market cap of listed trusts, or A-REITs as they are known.
According to the Commonwealth Property Office Fund (managed by divisions of the Commonwealth Bank) the market cap of these funds has “fallen from a high of $135 billion in September 2007 to $54 billion in December 2008.”
That would seem to stuff up the argument that ‘bricks and mortar’ is a safe investment. That’s a 60% drop in price.
You can see that reflected in the performance of the S&P/ASX200 Listed Property Fund [ASX: SLF]. This is an index of the listed property trusts in the top 200. Since it became tradeable on the ASX in May of last year it has fallen by nearly 64%.
Of course, that doesn’t mean that the value of the underlying properties has fallen by this amount. But it does give you a good idea of the negatives of investing in property.
The great marketing point of these trusts is that it gives the average punter the chance to invest in big buildings without having to have a big bank balance. Most trust require just $5,000 in order to take partial ownership of an entity that owns a fifty storey skyscraper in Melbourne, Sydney or Perth.
Who wouldn’t want a piece of that? But the downside of this is that punters can be just as quick to jump off the bandwagon as they are to jump on it.
And that’s where the problem starts for these guys. In normal circumstances the trust can just pay out cash to the selling investor with cash received from a buying investor. In order to combat any differences the trust will have a loan facility with a bank so it can pay out investors while it attracts in new ones.
That works fine until there is an overwhelming mismatch between buyers and sellers. And until the trust uses up most or all of its loan facility – as happened late last year with the mortgage trusts.
Once that happens, the trust has to start selling off assets, which in an already soft market is needless to say, easier said than done.
You only have to look at the balance sheet of the Commonwealth Property Office Fund to see that similar to the infrastructure funds, it is built on sand.
For the period ended December 2007, the fund booked revenue of $367 million. That’s pretty impressive. Except that nearly half of that was from a “Gain on fair value adjustments to investment properties.”
In other words, property prices have gone up so we’ll book that as revenue. For the period ending December 2008 it’s come back to bite them, because now they’ve had to book as an expense $184 million, due to the “Loss on fair value adjustments to investment properties.”
Over the same period rental income has remained flat. Why should it need to book unrealized capital gains as income? Naturally so it can pay out the distribution. The distribution that would have been marketed to super funds as being stable and secure.
Again, just like the infrastructure funds. We’ve seen how disastrous they have been for investors – especially BrisConnections in Brisbane – so let us not be too surprised if there is much worse to come from this market.
The creation of the government fund to prop up the commercial property sector is further evidence of that possibility.
How the Media is Focusing on the Wrong Kind of Waste
It seems as though the negative reaction by the popular press to government spending is in inverse proportion to the size of the spending:
“Kevin 747 insists $3.4m in fares is fair” – The Courier-Mail
“$1m smiles as Rudd pays for happiness” – AAP
“Nathan Rees unhappy with John Robertson’s $500,000 office refurbishment” – AAP
The outrage is almost deafening. “How can these pollies get away with spending all this money when the economy is going into recession” is the cry.
The Opposition is agog at the extravagance, the press is shocked that politicians could be so insensitive. Fancy going on such a spending spree when as Melbourne’s Herald Sun points out “State reels as 553 sacked.”
But wait, let’s travel back in time. Back to a time when the nation was foundering at the feet of despair. Back to a time when the universal message was that spending money was crucial.
Not just any old money of course, $42 billion worth of the stuff:
“Rudd and the Reserve free up billions to beat recession” – The Age
“Splashing the cash” – The Age
“Package ‘right for the times’” – AAP
In those days you couldn’t open a newspaper or turn on the TV news without some hack or ‘expert’ economist telling you that the only way to revive the economy was to spend. The $5 million highlighted above is just Rudd and Rees’ way of giving back to the community.
Imagine how much worse off Qantas would be without those air fares. Or how many consultants and interior designers would be ‘doing it tough.’
But here’s some breaking news for you. Far from politicians being embarrassed by these news stories of extravagance, they love it. In fact there is little doubt that they encourage it.
Why? Simply because it takes all the focus away from the money that is really being wasted.
If your editor had to make a decision on whether a pollie wasted $3.4 million on air fares, or wasted $42 billion on an economic stimulus package, we would take the $3.4 million any time.
Other Stuff on the Markets
Yesterday the US market rallied. Then the President spoke. Then the market fell.
Today’s early morning rally on the Aussie market seems to have been short-lived.
The ANZ Bank becomes the first of the big four banks to signal a dividend cut.
Macquarie Bank shares slump by 10%. Are they going the same way as B&B?