They call him the “Grave Dancer.”
It was a tag pinned on Sam Zell by an article in 1976 describing his exploits in buying up busted real estate projects on the cheap. The name stuck. It’s a good image for Zell’s style. As Hilary Rosenberg describes in The Vulture Investors, “Zell made his first fortune by tap dancing on the tombs of real estate projects… and later, he waltzed into corporate cemeteries.”
These days, the Grave Dancer is making more money than ever. I’m not sure what Zell’s net worth is now, but I’m sure the figure starts with a “B.” Therefore, when I had a chance to listen to Sam Zell talk about investing, I took it.
On a bright and warm autumn day, a flock of well-dressed and scrubbed financial types made the pilgrimage to hear the old man talk. At the New York Historical Society in Manhattan’s Upper West Side, Sam Zell took the stage in blue jeans and buttoned shirt, sans tie. Zell is 66 years old and very rich, which gets you a free pass to say and do what you want.
“There is a worldwide shortage of income from bricks and mortar,” Zell told us. More and more investors want income. Importantly, however, many of them no longer want income from the traditional sources, such as debt securities – most of which have become problematic since the subprime troubles of July – August.
In the fallout, many surprised investors lost a lot of money in things they thought were safe income-producing investments. Investment-grade securities aren’t supposed to lose value so easily.
An investment-grade rating once was an imprint of quality, like USDA prime beef. Today, the label means little. Mortgage-backed securities once thought beyond suspicion turned out to be disguised junk.
As a result, suspicion lingers around bonds of all sorts, but especially the manufactured variety produced by Wall Street’s packaging experts. No one really knows what’s in these things anymore. It’s like not being able to trust the food labels at the grocery store.
So the demand for simple and hard assets is high. Investors increasingly no longer want to own esoteric paper. They want to own tangible things, such as old-fashioned bricks and mortar, as Zell said.
Sam Zell said we were in the “greatest monetization in the history of the world.” What does this mean? Think of it this way: If you own an office building and go public, offering shares on your property, you have “monetized” the asset. You have realized cash and turned a physical thing into a tradable security. That tradable security is in high demand these days, because people want that steady income from real estate. And the monetization of real estate is the process of meeting that demand.
On a global scale, this trend is something that is only just beginning. If you examine the size of publicly traded real estate markets around the world compared with the total stock of real estate in each region, you see that very little real estate trades in the public markets. Europe has total real estate properties worth some $6.3 trillion yet has only a tiny sliver in the public markets – about 2.8%.
That’s because European countries only recently enacted U.S.-style real estate legislation. According to Cohen & Steers, “In Europe, in 2007 alone, the United Kingdom, Germany and Italy enacted [such] legislation.” Suddenly, sealed-off private real estate has an open door to public markets.
Cohen & Steer goes on to note: “The sheer size of German private real estate holdings, for example, is extraordinary; a significant amount of these holdings could enter Germany’s public real estate market by 2010.”
Then there is Asia. Parts of Asia, such as Japan, Singapore and Hong Kong, have had U.S.-style real estate laws in effect since 2000. So they are ahead of Europe. But the opportunity remains large. As you can see, there is still only a small sliver of real estate holdings in public hands. Privately held real estate makes up the vast majority.
Sam Zell is bullish on even North American commercial real estate. He said, “You must remember that commercial real estate is a global market. For a euro- based investor, U.S. real estate looks cheap.” As the dollar tumbles, it puts U.S. assets on sale. (For a U.S.-based investor, this trend of global monetization of real estate is a great thing. The more publicly traded global real estate out there, the more ways you have to hedge yourself against a falling dollar.)
Zell is no pie-in-the-sky theorist. He is active himself in Brazil, Mexico and Asia. He owns property and businesses all over the world. He sees with his own eyes the deals still there for the taking. At the conference, he described picking up a Mexican warehouse only 100 miles from the Texas border that pays a 14% cash yield.
The property was in private hands. It’s now in Zell’s hands.
Investors want that – steady income from a tangible thing – more now than ever, as Sam Zell pointed out. And the market will respond. The big trend in real estate is the conversion of private real estate into public stocks. Also, rapidly growing economies in Asia and South America push the demand for all things real estate. They need more of everything – from retail space to office buildings to warehouses.
So you have lots to build, lots already out there in private hands and vast pools of money ready to own real estate. You may remember a few letters ago I wrote about the sovereign wealth funds – those huge piles of cash in government hands (especially those of the Persian Gulf states and China). Zell pointed out that we have “only begun to see the impact of sovereign wealth funds on world demand [for real estate].” Zell opined they will be steady buyers.
Therefore, as Sam Zell said, buy bricks and mortar – especially overseas.
for Markets and Money