‘Money for Nothing’ in Commercial Property

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Yesterday I finished off with the idea that there’s plenty of bull factors that could start pushing property back up.

I’ve been saying the same thing since January this year.

I got another idea watching Channel Seven News last night. This is not a program that I normally pay much attention to.

But it reported on an important story. It’s a trend that could run for decades. Listen up!

Here’s what grabbed my attention while I was cooking dinner.

The reporter said there was ‘money for nothing’ up for grabs…

How so? Channel Seven was reporting on The Glen Shopping Centre in Melbourne’s southeast.

Here’s the story. In 2017, the company that owns it — Vicinity Centres [ASX:VCX] — sold the ‘air rights’ above the building to a property developer. There are 500 apartments going up right now.

I remember seeing the original story back in 2017. I’m not 100% sure why Channel Seven chose yesterday to update it.

No biggie. One of the men working on the project made a highly relevant comment. It’s the reason I’m pointing it out to you now.

I can’t give you the direct quote off memory alone. But he made this broad point: Air, like land, has value if you can build into it.

The rights to this space come with the property title.

Vicinity Centres is literally selling ‘air’ — money for nothing.

Think through the implications. If Vicinity can do this at The Glen, it can do it at other shopping centres.

So can other landlords. Broad point: The value of air rights will capitalise into the selling price of any property where this is likely to apply.

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It makes these commercial properties even more valuable than they are now.

Major point: It’s another reason why real estate values can go higher in Australia, contrary to general perception.

Consider that the trend in Australia is for higher population and intense urbanisation.

There could be plenty of demand for apartments built in a similar way to The Glen.

That’s not all…

Could 5G drive property higher?

It also made me think of the coming rollout of 5G.

This is going to involve large infrastructure spending because 5G requires far more antennas and communication points than the current 4G network.

It’s possible — I admit I’m not sure here — that this could turn into a separate income stream for properties that host this equipment. I have to do some more digging on this point. I might be off base.

Here’s why I mention it…

I remember walking around London with an old mate. After dinner one night, he took me to a building nearby in South London and pointed to the roof.

One of the mobile operators in the UK had some of its network equipment up there and a colleague of his owned the building.

The landlord made money off the tenants in his building and a rental fee for hosting the network equipment.

His building happened to be in the right spot to host stuff like this, though I can’t remember the exact reason.

Could 5G send this dynamic even higher? We’re going to find out.

Why we’ll keep booming and busting

Here’s a broader point: The landlord did not create the value of the telecommunication spectrum.

It just so happened his building was best placed to access it. The community could quite justifiably make a claim to these earnings. They’re classified as a natural resource ‘rent’.

The value of this access could be more justly shared by everyone to defray communal costs. Instead, it is privatised.

It is what it is.

But you’ll become much wiser to what’s happening in the economy when you begin to realise how much activity is not productive, and instead merely chasing the ‘money for nothing’ available around property and natural resources.

This is what leads to the fragility of the economy over time.

A couple of days ago, I mentioned that I’m reading Richard Vague’s book A Brief History of Doom.

Almost all financial crises involve a huge expansion in private debt.

What’s most important is what this debt is created for.

It’s almost always — at least as far as the worst downturns show — created to chase capital gains in the property market.

This has been going on for centuries. Vague cites the increase in American property values in one city going up thousands of percent in the boom that culminated in 1836.

Anyway, the point for today: Watch for more air rights to be sold off, higher debts to accumulate against these property values…then for it all to go over the top, like it always does.

Best wishes,

Callum Newman Signature

Callum Newman,
Editor, Profit Watch

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