Thursday, 3 March 2022 — Albert Park

By Catherine Cashmore Editor, The Daily Reckoning Australia

[6 min read]

Dear Reader,

We’re roaring into the second half of the real estate cycle.

That means over the next few years, a lot of money will continue to pour into Australia’s property market. And this includes the financing of some mega development projects.

One that hit the press last week is a $650 million plan to refurbish a tower at the ‘Paris end’ of Collins St.

ASX-listed developer Mirvac wants to revitalise its 1980s office at 90 Collins St to create a new ‘boutique workspace and office destination’ for the CBD.

‘The revamp of the tower would include an additional 15,000 square metres of commercial space, a new lobby to Collins St, dedicated wellness areas, a connection from Alfred Place to Pink Alley via the ground floor, which would accommodate 3500 workers.’

The project would take the building to 37 levels, towering above the neighbouring heritage buildings at 86–88 Collins St.

Doing this will claim exclusive rights to the air above the properties. Land titles will then be created for the offices, which fill the space:

‘By purchasing the air rights of 86–88 Collins St from level three and above, Mirvac said it would ensure that “no further development can occur on this historic site, assisting with the retention of this important Collins St address.”’

It’s a clever concept — but not a new one.

As I mentioned to my subscribers the other week, the idea of air rights was first conceived not from building up but building down.

In 1903, William Wilgus, a smart engineer from New York, was working to rebuild Grand Central Station and electrify the steam locomotives.

William’s light-bulb moment was moving the terminal underground.

That idea was inconceivable under steam technology.

This way, said William, developers could ‘take wealth from the air’ (i.e. the ground above) and claim the space on ‘air rights’ for themselves.

The buildings above would sit on the steel and concrete roof that covered the tracks.

The sale and lease of those buildings would create enough wealth to finance the transport system below — a form of ‘value capture’.

It took 10 years, 1 million pounds of dynamite, and the removal of almost 3 million cubic yards of rock and soil before William’s plan came to fruition. However, his ingenuity transformed Manhattan’s landscape forever.

Nowadays, developers are more likely to buy the air rights above an existing building and ‘air bank’ it (when zoning permits) to advantage their development.

The best and most famous example is Donald Trump’s monument to himself: Trump Tower.

It cost more than US$330 million to build. It’s one of the tallest residential concrete structures on Earth.

It was constructed using more than 90,000 tonnes of reinforced concrete.

It opened in the early ’80s mid-cycle downturn as you would expect based on the ‘skyscraper curse’.

Inside is a waterfall and public garden encased in more than 200 tonnes of imported Italian marble.

The development would (and should) have made a spectacular loss.

However, Trump was smart enough to purchase the neighbouring block’s air rights.

That block was owned by the jeweller, Tiffany & Co.

The conversation is recorded in Theodore Steinberg’s book Slide Mountain: Or, The Folly of Owning Nature (1996):

‘I’m offering you five million dollars [a bargain at the time]…to let me preserve Tiffany. In return you’re selling me something — air rights — that you’d never use anyway.’

Tiffany’s air rights allowed Trump to boost the floor space in the building by 50%, by building further outwards than would have been permitted otherwise.

This increased the price of each apartment substantially.

New one-bedroom studios sold for half a million dollars upon completion (US$1.2 million in today’s terms).

Views were guaranteed for the life of the development.

Trump’s building changed the way developers looked at air rights. It triggered the 1980s construction boom on a magnitude that had never been seen before.

The history is interesting. So too is the planned date for this project.

Construction will start in 2023. That means it will be completed toward the top of the current cycle in 2026.

It will be a precarious time for the real estate industry.

We’ll be on the precipice of one of the biggest market downturns since the early 1990s.

How can I be so confident? Click here to find out!

Best wishes,

Catherine Cashmore,
Editor, The Daily Reckoning Australia

By Bill Bonner Editor, The Daily Reckoning Australia

Dear Reader,

‘That’s life
‘(That’s life)
‘That’s what all the people say
‘You’re riding high in April, shot down in May
‘But I know I’m gonna change that tune
‘When I’m back on top, back on top in June’

Frank Sinatra, ‘That’s Life’

Ouch! Our small holdings of Russian stocks are down almost 60% so far this year.

But you’re probably wondering: what are we doing investing in Russian stocks in the first place?

Ah, dear reader…let us explain.

As we’ve seen, the markets move in great, generational sweeps from high to low and back to high again. The general rule (and we’re not divulging any trade secrets here) is to buy low and sell high. Many people have tried it the other way around, but the results have been disappointing.

We bought Russian stocks as part of a special program — mostly for fun — in which we invest in the worst-performing markets, counting on ‘reversion to the mean’ and ‘contrarianism’ to turn them around. After all, a single company can go down and never get up again. So can an entire industry. But not a whole country.

Often beset by worries, nevertheless, they tend to survive.

Horsesh*t predictions

In 1900, there was a major industry involved in cleaning the horse manure from city streets. New York, for example, had an estimated 50,000 horses, producing 15–35 pounds of manure, each, per day. That was 2.5 million pounds per day. The street cleaners were unable to keep up with it. One ‘expert’ forecast that London’s streets would soon be buried under nine feet of manure.

That was the great climate disaster of 1900…and it was, well, horsesh*t.

So too were the many crises and delusions to come along later. Child labour in the factories was a bugaboo in the early 1900s. Then came a war ‘to end war’. A ‘permanent plateau’ in the stock market was the forecast of the greatest economic expert of the era, Irving Fisher, in 1929. Bolshevism was seen as a threat to mankind in the 1930s and 1940s…followed by communism in the 1950s. In the 1960s, leading economists were still predicting that the centrally planned Soviet Economy would overtake the US. In the ’70s, climatologists were concerned about ‘global cooling’. In the ’80s, Japan’s model of government-led capitalism seemed unstoppable. Then came the dotcom bubble…in which it was predicted that growth rates would now speed up because the new internet made the world’s knowledge available to everyone. Why live in darkness when the light switch was now just a click away?

Then we discovered ‘terrorists’ in our midst…followed by Ben Bernanke’s hallucination: ‘We may not have an economy on Monday’, said he, in 2008. More recently, COVID was advertised as though it was the Great Plague…and now, the Russians are threatening our Western civilisation.

But since the advent of the 21^st century, US GDP growth rates have been cut in half. War is still in the news. Experts believe the world is heating up. Japan seems to have fallen into a permanent on-again, off-again, slump. Bolshevism has disappeared almost everywhere, except perhaps on US university campuses. Terrorists, too, have practically disappeared from the headlines. The economy is still in business. COVID has left more people on planet Earth than it found. And child labour? In the 50 states, we can scarcely find a factory for anyone to labour in.

From these facts, laid down before us like stepping stones across a woodland stream, we could probably take a leap to many different insights. But rather than risk a slip, we will merely conclude that ‘things change’. ‘Tout casse, tout passe’, as the French say. Everything keeps moving…the tides ebb and flow, as the ancient rhythms of life continue. You’re riding high in April; shot down in May. That’s life.

Most of the people, most of the time

Russian stocks were shot down long ago. But they didn’t die. Rarely does a whole country go out of business. Instead, it goes up and down.

When we bought them, Russian stocks were among the most unloved equities on the planet. And yet, they were real companies, operating in a real country…with very sophisticated engineers…a large domestic market, and all of Europe just a pipeline away. And now, they are even cheaper.

But wait. Russia is a pariah. Russians are ‘bad guys’. The world has turned against them. And Russian assets are stranded, doomed. Yesterday, the Russian stock market was closed. In New York, the losses mounted up so high that trading in Russian shares was halted. But a few Russian stocks and ETFs still traded in London…and it was a bloodbath. The two leading Russian stock ETFs dropped 25% each. Russian bonds, too, have collapsed; they are now selling for about 33 cents on the dollar. The Russian ruble is losing value on world markets; in Russia, the physical currency is hard to get, with long lines of people trying to make withdrawals. And Sberbank, whacked by sanctions and thought to be near bankruptcy, lost 75% of its value.

Did investors overreact? Did politicians?

In private life, most people get along tolerably well. They pass through intersections without damage. If they earn sixpence, they spend sixpence, not more. They grumble but render unto Caesar that which he asks.

But in public life, most people are wrong, most of the time, about almost everything. Humans take their cues from others, especially their leaders. They go to restaurants that are popular…read the books that others are reading…and wear the clothes they’ve seen on their friends and influencers. They tend to bunch up, unite behind jackass leaders, trample each other in a stampede, and pay too much for their favourite investments.

But there’s always more to the story; eventually, it comes out…

In the short run, says Warren Buffett, the stock market is a ‘voting machine’. The mob votes for stocks like it votes for politicians — electing loudmouth buffoons and slick frauds. The contrarian takes the other side of the trade. He votes for the underdog and waits for June.

Regards,

Bill Bonner,
For The Daily Reckoning Australia