Why This Real Estate IPO Signals Recovery for This Major Economy

Uh-oh, this is beginning to look a touch embarrassing. Real estate agency McGrath Limited [ASX:MEA] went into a trading halt yesterday.

That’s another milestone the company would rather forget. It’s been a shocking start since it listed in December. The stock is currently down 38% from its initial offer price.

According to the announcement on the trading halt, the company is reviewing the forecasts it made in its prospectus. We’ll find out on Tuesday what the latest is on the situation. But we can assume from the chart that the news is not going to be good.

Take a look….

The Long Slide Down for MEA Stock

Source: Market Analyst

Click to enlarge

My colleague Terence and I actually profiled McGrath on 29 March for our Money Morning Trader service.

At the time we gave the company the benefit of the doubt, to a degree. We wondered if the stock was merely overpriced at listing and was being marked down accordingly.

However, there was nothing compelling about the chart, so we concluded like this:

We don’t have to decide what the future holds for MEA. The chart will tell us what the market decides.

Certainly, we don’t want to go bottom fishing. We’ll leave our capital for stocks in better positions than MEA right now.’

The market is passing its judgment on MEA, and it’s not looking good currently. But take this as an instructive lesson.

This is how a study of charts can keep you out of stocks trending downwards and keep your capital for the stocks moving in the right direction…that’s up!

Existing MEA shareholders probably won’t get a nice surprise on Tuesday. But if they’d followed the chart they might have guessed good news wasn’t coming anytime soon and got out before it went into a trading halt. That’s a nervous wait I can live without.

That’s how we can help at Money Morning Trader, anyway, so if that sounds useful, go here for more info.

Mind you, I don’t take the performance of MEA to mean anything particularly broad about Australian real estate in general. It’s just one stock in a major industry. AS far as the wider property market goes, don’t read too much into it.

Behind the scenes big money is being spent on real estate

Real estate is always interesting to follow. It doesn’t even have to be in Australia. The globalised economy means we’re pushed and pulled from directions far from home.

Take Italy, for example. For all the news about bad loans and its broken banking sector, there was a very interesting development out of Italy this week.

A real estate company based out of Milan is due to launch an IPO this month to raise €215 million (AU$314 million).

This is the first real estate IPO the Italian market has seen in a decade. It’s been a long ten years for Italy.

That’s because there’s STILL a major hangover from 2008. The Italians have recently been wrestling with the EU bureaucrats to set up a ‘bad bank’ to deal with Italy’s €350 billion in non-performing loans.

Things are slowly happening on that front. It’s hindering the economy in the meantime. Italy’s GDP growth is forecast to be under 2% in the following two years.

But it’s what happening behind the headline figures that I always pay attention too. And the big guys are buying up Italian assets.

See for yourself. According to the Wall Street Journal

Meanwhile, demand for Italian commercial real estate is booming as international investors hunt for returns amid low interest rates. Commercial property transaction volumes in Italy rose 66% in 2015 from 2014, according to Real Capital Analytics.

This is bullish as far as I’m concerned. It seems to be the shrewd and the financed are buying up assets all over the world. Such is the way of downturns like this. The indebted swap assets with those that have cash on hand.

As the bad debts clear and property is bought up, things in Italy will soon be onwards and upwards. The same thing is already happening in Spain and Ireland.

A new trend is growing in Europe

What’s also interesting is that REITs have incredible room to grow in Europe. According to the WSJ, the listed real estate sector in Europe is relatively small compared to the US and the Asia Pacific. Europe’s share is only 15.4% of the global total, according to figures the article cites.

But REITs are slowly spreading into countries where they previously didn’t exist: read Germany, Spain and Ireland. This is a trend worth watching.

With the rise of mobile capital and sovereign wealth funds, there’s huge pools of money to buy major assets. The economy of the world is becoming more interlocked everyday.

Not all of that cash may be clean in the way we would like. The Panama Papers leak suggests a lot of money is tied up in London property under offshore companies. UK Land Registry data show that overseas companies own 100,000 properties in England and Wales.

The FT quoted Donald Tood, head of the National Crime Agency, as saying last year that, ‘the London property market has been skewed by laundered money. Prices are being artificially driven up by overseas criminals who want to sequester their assets here in the UK.’

As my colleague Phillip J Anderson says, events happen for the 18 year real estate cycle to continue onwards and upwards.


Callum is a feature editor for Money Morning. He covers areas of interest arising from world markets and the global economy that could mean new investment opportunities for Aussie investors.

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