The Real Estate Espresso Podcast

London has been paying the price for Brexit for nearly five years as the uncertainty of the outcome had businesses leaving the UK for a headquarters on the continent. Many companies chose the UK because it is English speaking and has a stable legal and monetary system, while giving those companies full access to the European market under the single pan European economic zone. But then those same businesses faced the prospect of losing access to the vibrant European market by virtue of having located in the UK, many businesses relocated to Amsterdam, Copenhagen, Belgium, and Germany. Real Estate prices in London predictably fell hard over the past five years. Here we are in 2021. Real Estate prices are showing a surprising rebound. Is this the same artifact that we have seen during the pandemic where supply of homes for sale diminished significantly? Throughout 2018, 2019 and 2020 we’ve seen one business after another relocate from the UK to other parts of Europe. Some of them relocated to Ireland which remained as part of the European Union. The UK is now divided with one foot inside the European Union and one foot outside. Needless to say, there has been a flight of capital from England to other parts of the UK and to continental Europe. For future for real estate in London looked bleak. Vacancies are up, and commercial vacancies have hit troublesome levels. But then came China to the rescue. You’re thinking wait, what? What does China have to do with England? How can China help UK real estate? Since the new security law was enacted in Hong Kong in 2020, the central Chinese government has taken steps to eliminate dissent. Freedoms in Hong Kong that were taken for granted under British rule are disappearing. The new security law, under which at least 100 people have already been arrested, makes it easier to punish demonstrators and reduces Hong Kong’s autonomy. This month, 47 activists were charged with subversion under the legislation, after a mass arrest in early January. Earlier this year, the Hong Kong government told UK citizens that they will need to choose between the having British status or Chinese status. On March 11, the Chinese central government put another nail in the coffin of freedoms in Hong Kong. But one thing is clear, people from Hong Kong have started arriving in London. They speak the Queen’s English and they are bringing investment dollars with them. There has been a surge in interest in London real estate from Hong Kong over the past year. According to Astons, Hong Kong residents represented the second-largest foreign buyer group in prime central London in the first three quarters of 2020. They accounted for 9.2% of foreign property purchases and spent an estimated £305.5 million across 243 transactions—or roughly £1.19 million (US$1.67 million) per property. So far in the second half of 2020, property prices in London edged up about 17,000 pounds. That’s not a huge increase, but its a reversal of the previous trend over the past four years. Pay close attention to geopolitical migration.

On today’s show we’re trying to make sense out of our financial markets. You would think that the Federal Reserve, the central bank for the world’s reserve currency is influential in the world’s monetary system. So therefore the chair of the Federal Reserve would hold the single most influential banking position in the world. You would also expect the person occupying that chair to demonstrate a modest amount of fiscal responsibility. It used to be the case that printing of money was something that was spoken of in hushed tones. It was a bit like cheating at the black jack table. Professional card players didn’t speak about it, but everyone knew it was happening to some degree. But now in 2021, there is no attempt to hide it. The US Federal Government brings in 1.7T in personal income taxes per year. That’s about half of the total revenues it brings in each year. But in 2020, the Federal Reserve printed about the same amount of money that the US government collected in taxes. Nearly 1/5 of the dollars in existence since the beginning of the US as a nation were printed in 2020. Now the latest comments from the Federal Reserve Chairman seem to focus less on any measure of inflation, but on the “anchoring of inflation expectations”. Anchoring is a concept that applies to psychology. If you believe it’s warm out, then it’s warm out. If the weatherman says the temperature is 10 degrees today, then it’s 10 degrees. The temperature has been measured and reported, irrespective of the weatherman’s opinion on the temperature. But if the weatherman says, it’s a beautiful warm day today, and the temperatures will be a nice balmy 10 degrees by mid afternoon, he is said to be anchoring an expectation. The Fed chairman in his remarks Monday, prepared for a presentation to the House Finance Committee today, said that a short term jump in prices would not be enough to trigger a panic about inflation. He said that as the economy emerges from the pandemic, there will be all kinds of increases in demand, and supply chain constraints, that will trigger price fluctuations. These price increases don’t concern him. He’s focused on the long term anchoring of inflation expectations at the 2% average. They intend to keep interest rates low until the economy reaches full employment and interest rates exceed the average 2% anchored expectation. The countries with excess US dollars are starting to get worried that the US is printing too much money and therefore the value of the dollars they’re holding is declining. The international market is clearly attaching a risk premium to the US dollar. But the US continues to behave as though it can do what it wants, when it wants as if it sets the rules alone. If the Fed says interest rates are low, then rates are low, irrespective of what international investors are saying. Other countries have tried this approach and failed. I’m thinking of modern day Argentina where interest rates are 38%. Back in 2012, their interest rate was a fairly respectable 9%. They boldly started printing their way out of their economic malaise. The memory of hyperinflation in the early 1990’s was a distant memory. But then why would other countries be selling their US Treasury bills and using the proceeds to buy gold? Russia sold almost all its US Treasuries and bought gold instead. China has been on a gold buying binge over the past 20 years. When I hear the word “anchoring” in the same sentence as inflation, I hear that the measurement is being replaced with a narrative, in order to direct attention away from the facts.

On today’s show we’re talking about construction budgets and how to make sure you’re insulated from construction price increases during the early phases of a project. When you’re investing in new construction, you need to lock in expectations. You are setting expectations with your lender who is going to take a few months to underwrite the project and approve the loan. You’re dealing with investors and you’re setting expectations on the total equity investment and the rates of return. Then along comes a year like 2020, or 2021 and construction prices are volatile. How do you set realistic expectations with your lender on the total investment? How do you set expectations with your investors when the ground is shifting beneath your feet? This raises the question about whether we’re in an inflationary environment or not. Are the price fluctuations an artifact of short term supply constraints? It’s been clear that lumber prices have swung wildly over the past 12 months. In March of 2020, lumber was priced at $264 per 1,000 board feet. By September, the price was $985 per 1,000 board feet and by November had fallen to about half that price. Today we’re back up around $1,000 per 1,000 board feet. Are these prices here to stay? Over the past 20 years, prices have fluctuated up and down. Energy prices are up compared with this time last year. Oil is now up to about $67 per barrel. That’s more than double the price at this time last year. We even had a short term supply glut when prices ran negative as some futures contracts expired with a shortage of midstream storage capacity. Inflation as measured by the consumer price index is an average over a basket of goods. If prices for materials go up, will rents go up correspondingly? Will salaries go up correspondingly or not? Which of the metrics be negatively impacted? Modeling the future of a project that is a year away from construction becomes an exercise in Crystal ball gazing. How do you buffer your project for construction price increases? Do you assume that rents will go up or not? So the question becomes, how do you plan your projects to be resilient in the face of inflation, and the beneficiary in the event of longer term inflation? We’ve spent a lot of hours modelling these scenarios in our business as we put together various pro-forma estimates for our projects. There are two questions that you need to answer. What would be the impact on the IRR on a 5% increase in cost of the project? Is it still a viable project? Are your profit margins still in an acceptable range? Will your debt coverage still meet the metrics with a 5% increase in cost? What happens to the cash position within the project if you’re faced with a 10% increase in hard construction, or a 5% increase in overall project cost? Do you get backed into a corner and risk running out of cash during construction? It’s the second scenario, running out of cash that is the most dangerous to a project. You have to make sure you don’t run out of cash. That means using your leverage responsibly. It means increasing your loan reserves to protect the project. It means bringing 5% more equity to the table. If you bring 5% more equity to the table, you could theoretically borrow 5% more money if you needed to. That doesn’t mean you have to increase the cost of the project by 5% in your pro-forma. You still have your original plan based on a prudent forecast of construction costs. But if you had to ask the bank for additional funds, you have the necessary equity already raised as part of your capital raise to handle the larger loan request. In an inflationary environment, the road can be bumpy. It will likely work out in the end and leverage will multiply your returns. But you need to design in a buffer to protect yourself from the downside risk.

Dr. Trevor Blattner is an endodontist (specialist in root canals) and real estate investor. On today's show we're talking about his new book "Redefining the Top 1%".  Everyone's journey into real estate investing and development is unique. To learn more reach out to Trevor at  DrTrevorBlattner.com You can pre-order his book and take advantage of a bunch of pre-release goodies including the workbook and the audio book. 

John Lee Dumas is the host of the wildly popular Entrepreneurs on Fire podcast. After more than 3,000 interviews with the world's leading entrepreneurs, he has distilled down a decade of learning into a new book that represents  the 17 key steps to have a successful business and a successful life.  The book is called "The Common Path To Uncommon Success" by John Lee Dumas. The book launches on March 23, 2021. Go to uncommonsuccessbook.com to pre-order your copy. John includes a number of free additional resources for those who pre-order the book.  I'm an avid listener as well to his daily show Entrepreneurs on Fire which can be found on all the major podcast platforms. It was Entrepreneurs on Fire which was my inspiration and proof point that a daily show was both possible and realistic. Now nearly three years later, The Real Estate Espresso Podcast is still going strong as a daily show. 

On today's show, this is a personal reflection on a day that seemed filled with setbacks.  It’s easy to get discouraged when setbacks occur. But as I took inventory of my own emotional state at the end of the day. Surprisingly, I was not upset. I came to the conclusion that what happened had nothing to do with me. Those setbacks in a project don’t reflect on me personally. I clearly wasn’t happy about the situations. But I wasn’t upset. I found that my energy and focus remained consistent throughout the day. Each setback was met with immediate acceptance of the reality. The decisions that resulted from each of those setbacks were obvious. There was not angst, no worry about the future. Just simple logical decision making. I have to tell you, this was not always the case. There was a time when I was younger that I would have grieved during a setback. I would have experienced a sense of loss. But today, I don’t As I spoke with members of my team, there was a real recognition that the journey we are on is truly the best part of the experience. Setbacks are part of the process. We’re truly having an amazing time, even when the ball takes a bounce that is not the way we wanted. We also have dozens of things that have happened the way we would want them to. It’s easy to focus on the negative. Those items are glaring. I’m closing out the day with an immense sense of gratitude for the commitment of our team, and for the support that we have received along the way.

On today’s show we’re talking about government playing a central role in monitoring every single financial transaction in a nation. Crypto-currency has been hailed as a way to break free from the chains of government based fiat currency. So far, many nations have not weighed in on crypto-currency. The two best known forms of crypto-currency are Bitcoin and Etherium. But in truth there are several thousand such currencies in existence. They vary in their features and functionality. Governments are clearly afraid of losing monetary control over their economies. They are not about to surrender control of the money supply to a merry band of independent software programmers. I expect we’re going to see governments start to implement their own version of a crypto currency in order to sell the benefits of crypto to the general public. The first country to start the rollout of a digital currency is China with the digital Yuan. So far, the country has the currency undergoing limited trials. Benefits that some users report include the convenience of paying with their smart phone. This is similar to the convenience of paying with something like Apple Pay on your phone. But in this case, there is no middle-man, and there are no transaction fees that are typically associated with digital wallets. Digital wallets like Ali-pay or Tencent’s WeChat Pay have received wide adoption in China with over 700 million users of these systems today. Both companies are required to share transaction information with the central government if requested. Right now, the central bank has the a trial with about 700,000 users participating in a trial. The central bank has said that they intend to protect privacy. This means that privacy may exist horizontally. If you buy groceries at the store, the grocer won’t have any information about your identity. But vertically the government has full visibility of all of your transactions and funds. Now I’m not a huge conspiracy theorist. But the fact is, giving government full oversight over every single transaction in the economy represents a massive invasion of privacy. In case you think this is only happening in China, think again. The president of the Federal Reserve Bank of Cleveland made comments last September at the Chicago Payments Symposium conference. In her speech, she outlined a number of initiatives underway at the Federal Reserve. Legislation has been proposed that each American has an account at the Fed in which digital dollars could be deposited, as liabilities of the Federal Reserve Banks, which could be used for emergency payments. Other proposals would create a new payments instrument, digital cash, which would be just like the physical currency issued by central banks today, but in a digital form and, potentially, without the anonymity of physical currency. The Indian crypto community is closely watching whether the Indian Federal government will ban cryptocurrencies, including bitcoin. The latest information regarding the Indian crypto ban comes from Reuters which reported Sunday night that “India will propose a law banning cryptocurrencies, fining anyone trading in the country or even holding such digital assets.” If you’re keeping you cash in your own Digital wallet that is located on your phone, what happens to all the bank deposits? If there are no bank deposits, how is the bank going to have sufficient funds to lend money out? Of course they don’t have enough money now. They only keep 10% of the loans on their books in deposit reserves now, and in some countries in Europe, only 3%.

On today’s show we’re looking at the fragile recovery in the travel and hospitality sector. This week was March break in much of North America. The signs of recovery are starting to show. This is clear from anecdotal reports, as well as from the hotel analytics firm STR Global. STR issues a weekly report on the health of the hotel industry which can be viewed on the data insights portion of their website. The leisure-and-hospitality industry added 35,700 jobs in February. Hotel occupancy for the first week of March was 49%, a 20 week high. The increased willingness to travel seems to come down to a number of factors. Falling case counts across the nation. Increasing number of people being vaccinated. Fatigue with the whole pandemic. Some states have opened up their economies Overall, occupancy has recovered to 70% of pre-pandemic levels and REVPAR has recovered to about 55% of pre-pandemic levels. One hotel that we monitor closely is the Golden Nugget Hotel and Casino in Lake Charles Louisiana. One of our team members attempted to book a room this week at this 1,100 room property and found that there was no vacancy mid-week. Even in our own portfolio of short term rentals, we’re seeing climbing occupancy. Throughout ski season, we experienced occupancy of close to 90%. We’re seeing longer term reservations and rising nightly rates. All of this seems positive for the upcoming summer season. But we don’t believe that occupancy levels will return to pre-pandemic levels until international travel returns in a big way. Many countries have still closed their borders and many are grappling with the whole question of vaccine passports. While none have truly implemented this, we have yet to see how international travel will be held back by rates of vaccination. There are obviously ethical questions about whether restricting travel based on vaccine status is an infringement of human rights. No doubt there will be legal challenges on this question. We are starting to see capital transactions happening in the hotel business. Blackstone Group Inc. and Starwood Capital Group said Monday they had teamed up to buy Extended Stay America for $6B. Extended Stay is a midprice hotel chain that focuses on lodging for guests interested in staying for weeks or longer, offering kitchen facilities and more space than a typical hotel room. During the pandemic, its rooms and suites attracted essential workers, healthcare professionals and others who needed to travel. That business helped Extended Stay achieve a 74% occupancy rate last year when occupancies industry wide were running below 45%. This says that the inclusion of full kitchen has made the properties a more desirable product in the market. It mirrors the experience we have had in our own portfolio of short term rentals that happen to be located in hotel properties with rich amenities. Blackstone are experts in the hotel business. They’re a savvy buyer. They used to own Hilton hotels from 2007 to 2018. They bought Hilton at the peak of the market and within months were deep underwater on their investment. Through hands-on management, rolling up their sleeves, they learned the hotel business. By the time they turned it around, Blackstone turned a catastrophic loss into a $14B gain. This is a savvy purchase. The market place should pay attention. I predict that this is not the last move that Blackstone is going to make in the hotel industry. They might make further acquisitions. They might reposition the brand. They might use the Extended Stay America brand as a launch point to purchase distressed assets that can complement the existing portfolio.

Today's question come from David in Belize.  Love the show and thanks again for all the work you put into it.  We always hear if you see a problem, find a solution. I see a big problem in Ambergris Caye Belize in parking. I think we could help the downtown area since there is always no parking and streets very congested. We would have challenges as to locating a lot. The lot if we found would be around 50’ x 70’ . The garage would be for golf carts and we can do 4 or 5 floors. We could do concrete, steel or a combination of them. I would want an elevator or 2 and maybe 2 entrances and exits. But 1 may work. So, 2 people working 2 shifts so like 5 people. Plus, maybe a maintenance person. I feel we would get a lot of long-term workers paying and then the tourist. The other challenge is the hourly or daily fee. I see some parking lots lot’s charge like $25 USD a day. The airport charges $2 just to go in and $25 USD a day as well. I need to do some more research but there are no garages here other then just empty lots they rent spaces out in Belize City and places like that. I was wondering your thoughts on a syndication on a parking garage. The payback would be a bit long The spaces would be like 100 for the 5 floors. After the setbacks, road drive paths. Maybe $800k to $1M to build. At $12.50 per day average Seems like the umbers work at 50% occupancy. David, thank you for the kind words and this is a great question. I’ve been to San Pedro in Belize and I know exactly of the parking problem you’re speaking about. It’s a dense area and there is very little parking. There are narrow streets packed with small shops and lots of pedestrian traffic competing with golf carts for a clear lane. The town has lots of character, even if it seems a little chaotic a times. Parking is one of those real estate plays that are not very sexy, but can be a great investment. In fact, one of the largest companies in France called Vinci made its’ wealth globally by investing in parking lots all over the globe. The problem with parking lots is that when many of the transactions are done in cash, for whatever reason cash has a tendency to go missing and not be fully accounted for. If you have a parking lot attendant who is handling a lot of cash and they’re earning only a few dollars an hour, the temptation is simply too great for them to pocket some of the extra change. Even if you make the parking lot attendant a partner in the business, they could still steal from you. In tropical locations like Belize you could experiment with electronic payments exclusively, but I don’t know if that would be a barrier to adoption. It would probably work with tourists who regularly carry credit cards. But the locals may choose not to use it. I would test market your idea on a limited basis with an existing ground level parking lot. Structured parking is expensive and you need to gain some operational experience in the local market to determine whether the idea will work. That will make for a much more compelling value proposition when it comes time to raise the capital for the construction. Finding the right location for a parking lot can be a challenge. Sometimes, you may find an old building that is condemned or functionally obsolete. Parking can be a very viable temporary investment. You buy the derelict building, demolish it and build a temporary parking lot for a year or two while the developer who will ultimately develop that location gets their plans and financing together. You may be able to propose a deal with a local developer to operate the parking on their behalf in order to gain first hand experience with managing a parking operation on the island.

On today’s show we are talking about how to win in a super competitive environment. There is no question that today’s environment resembles more of an auction than a true market place. We see it consistently in the single family home market and even in the market for multi family apartments. Last week a colleague of mine was shaking his head at the sale of a rural single family home with no municipal services that sold for $500,000 above its fair market value. The buyer was so frustrated with attempting to buy in the core of the city that they overpaid simply to buy some acreage. I’ve observed sales of apartment complexes that frankly make no sense. Some sellers are demanding that buyers deliver a firm offer with no conditions, or a conditional offer with $200,000 non refundable deposit in order to be eligible to bid on the purchase. Offers without these conditions will not be considered in the words of the listing agent. The apartment complex in question is an older property with obvious deferred maintenance in a lower income area of Dallas. I personally would never make a purchase under those conditions. Yet it appears that some buyers are willing to go there. So if you are a sane rational buyer, how do you win in this environment? Do you lower your standards and succumb to the insanity? The best deals are done off market so that you stay out of the auction environment. But what if you can’t seem to find these off market deals? The auction buyers are obsessed with speed. They want to see a new listing. They will offer on a listing that is hours old. If a listing has been on the market for 30 days or longer, the auction buyer automatically assumes that there is something wrong with the property, that the property has been rejected by the the competitive buyers. It can’t possibly be a deal if it’s still on the market after all this time. What if the assumption is incorrect? You have the entire auction marketplace looking with anticipation at new listings. They want listings that show 1 day on market. They are not focused on the listings that show 25 days or 35 days on market, or 60 days on market . Those listings are stale. In truth, some of those 25 day old listings were on the market for one day, they were conditionally sold for several weeks and then reverted back to being an active listing. In truth they’ve been on the market for two days, but the listing shows 25 days because they were conditionally sold for 23 of those 25 days. The number of buyers for the stale listing is reduced dramatically. You might be the only bidder for a property that just came back to active listing. So how do you ensure that you get a good shot at these properties? You track the properties that show as being under contract. You let the broker know that you are a patient buyer and that you are interested if the property goes back on the market. You are in a different category than the other offers that were ultimately rejected 25 or 30 days ago. Those buyers have moved on to other properties. You are at the front of the line to buy a cancelled contract. In an environment where properties are selling above asking price, some relative bargains are possible. If you want to get out of the auction environment, then your first choice will certainly be the off market property. A close second could be the cancelled contract that is unfairly labeled as a stale listing.