Rob Coyte's Blog
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- Prosper or Panic? 06-Oct-2011
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Commercial Property Set to Boom (if you still own it)
Kevin Stanley from CBRE has said that rental growth as well as a reversal of the blowout on capitalisation rates (where investors demand a greater income yield on assets) will see an increase in the value of these properties. The cities that are expected to have the best growth in rental income are the main centres of Sydney and Melbourne. CBRE's rental growth in these cities is forecast to be 7.5% and 6% per annum until 2013.
BIS Shrapnel recently said that the commercial property investment community overreacted to the financial crisis which will result in solid gains in rent and values as they play catch up. This fact along with the underlying fundamentals of demand and supply, they believe vacancy rate in Sydney will fall to 5%, will also be supportive of rents and capital values. They are extremely bullish on rents saying that they expect rent to increase between 85%-100% between now and 2017. They go on to say that the past and current caution of the banks and investors is going to lay the foundation for supply shortage over the next few years providing great opportunities for patient investors.
Given all of this why are the Australian banks putting so much pressure on the unlisted property sector to continue to sell assets at this point of the cycle? Surely, it would be both the banks interest and the investors in these assets to sit tight and wait for the cycle to improve. Banks have behaved disgracefully during the global financial crisis in regards to these borrowers who even though they are still collecting rent and paying their bills have seen the interest they pay increased dramatically. This increase has not been as a result of the general level of interest rates going up rather the banks have increased the margin which they charge the borrower on top of what the funds cost them. Given the lack of competition in Australia as a result of the GFC these investors who are mainly mum and dad investors will see a tremendous amount of their wealth passed onto the banks at best and destroyed at worst due to rash asset sales. An organisation called the Light of Day has been attempting to lobby the Australian Government on behalf of retirees and other investors in these investments at this point with no success.
Why is Centre Capital Supporting a Bid in Orchard Process?
We have receieved a few queries from clients and other parties regarding our support for one of the bids lodged in the Orchard process. We have produced this document to paint a clear picture.
Is Centre Capital Bound to the Bid?
While we participated in a bid we are not exclusively tied to it. We expressly reserved the right to support a better option if one emerged.
Why Did Centre Capital Get Involved with the Bid in First Place?
Our process was to support an option we could recommend in the absence of a better option to ensure there was a solution at the table. To have a solution you need a couple of things: the know how and the financial backing. This syndicate had both and we were not willing to see them walk away from the process as this would not have been in the investor's, our client's, interests.
The syndicate behind the bid accepted our support and participation on a non-exclusive basis because they recognised we had this duty to our clients; even though a one way option from their perspective was suboptimal.
Does Centre Capital have an Economic Interest in the Bid?
No.
Where Does it Stand Now?
Now that we have seen board changes at Orchard and hopefully a change in the current KPMG process is not far away we are now looking to see if a better option emerges for our clients.
Bigger is Better
When talking to prospective clients it inevitably comes up that some people feel safer by investing through larger institutions. We believe that whilst there can be good points about all business models we feel that our model is specifically designed for our clients and here is why.
- Our clients get a personalised service where you are more than a number.
- Larger institutions can tend to want to push “product” that they are associated with. Centre Capital just wants to access the best possible solutions for clients regardless of where they may be found.
- We believe that larger institutions methods for managing money can be to protect their own business models not to give their clients the optimum solution.
- We tap into a whole range of research and ideas to ensure that we are getting a broad range of ideas to formulate strategies for clients.
- The strategies we recommend for clients are the strategies we implement for ourselves personally. If it’s not good enough for us it’s not good enough for our clients.
Furthermore, as with all things in life sometimes things don’t turn out according to the script that is where you will need someone that will get in and look after you. We have fought hard for our clients over the last couple of years including taking on one of the big 4 banks and a large managed fund to ensure our clients interests were looked after.
Where Is Your Super Invested?
RICE Warner Actuaries have released a report saying that superannuation will grow to $1,583 Billion by 2014. This will mean an average member balance of $78,000 at that point in time.
As can be seen these amounts of money are quite large and it always surprises me when people have no idea how their superannuation money is invested. Even when people know that it is in a fund of some sort they have no idea how the underlying fund invests their money.
Whilst raising concern it is important to also realise this does not have to be the case and that you can take hold of your superannuation and “control” where it is allocated. This means that you are only getting exposure to investment assets that are suitable for you and your circumstances. For this reason a large portion of our clients utilise Self Managed Superannuation a sector which is forecast to grow to over $400 Billion in next 5 years. We can show you how to get the advantages of such a super structure and take control of your money and your future.
The Psychology of Investing
"Ben Graham's conviction rested on certain assumptions. First, he believed that the market frequently mispriced stocks. This mispricing was most often caused by human emotions of fear and greed. At the height of optimism, greed moved stocks beyond their intrinsic value, creating an overpriced market. At other times, fear moved prices below intrinsic value, creating an undervalued market".
Robert G Hagstrom
Investing is often referred to as an art not a science. One of the main reasons for this is the behavioural patterns of investors and how the decisions they make are influenced by certain events and the human traits that lead to those decisions. A field known as “Behavioural Finance” has evolved in an attempt to understand how emotions and cognitive errors influence investors and the decision making process. To be a successful investor we need to firstly understand our own “emotional” make up and then ensure that our decision making process is allowing for the fact that these factors will be involved in the process, after all we are human.
Fear and greed are the two most commonly referred to by people that follow markets however, there are others.
People tend to give too much weight to recent experience and extrapolate short term trends which is against what will happen over the long term. Professor Schiller studied this phenomenon and found that at the height of the Japenese share market 14% of investors expected the market to crash. After it did crash the amount of investors expecting it to crash rose to 32%.
As investors people need to discern between skill and what was luck. Human nature is to say that good results are that of skill whist bad results are that of bad luck. It is important to remember that the future is uncertain and unknown and when you make a decision it is based on the information you have at the time. If investors expect to know what events will transpire in the future, like a global financial crisis the extent that we have seen, then they are bound to fail.
Ego, confidence, ability to blame others, regret are all factors that influence our cognitive decision making process to be an investor we must understand our decision making process if we are any chance of making good decisions.
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