Oh my — you won’t believe this. This time last month, I told you about something called the ‘skyscraper curse’.
It’s the bad history that record tall buildings have of opening either empty, in recession, or both.
In June, I pointed out that Melbourne’s ‘Australia 108’ building (due to be the tallest in the Southern Hemisphere) was struggling to make sales, while apartment valuations were down on previous highs.
We’ve also been tracking the fate of uber development Central Park Tower in New York since January (the signs weren’t great back then).
This is the world’s tallest apartment tower going up. The developer was hunting for buyers earlier in the year.
We’ve also flagged real estate veteran Sam Zell cashing up and getting out of commercial property in the US.
Now we have another warning sign flashing in India…
The Financial Times reports that what was supposed to be India’s tallest building — the Palais Royale — is an unfinished construction site…and the signs don’t look good for it to be finished anytime soon.
Oh dear. This looks a familiar tale…
‘…bets on expensive property have now gone bad in an economic downturn, scaring off buyers and choking the flow of credit. That has left the real estate sector with a formidable mound of debt.’
The FT cites a consultancy group that says this problem is not confined to Palais Royale. It’s possible that half of all luxury real estate in Mumbai is unsold.
Let’s step back a moment. It appears a typical real estate dynamic is at work.
Projects were planned and financed when the economic outlook was strong.
Now that dynamic has shifted…and developers are left with unsold stock and little revenue to pay off their debts.
Why is this dangerous?
Firstly, it could send the banks and finance companies into credit stress from the problem loans. That can cut off credit to the wider economy…and slow economic growth.
Another concern is that the construction companies start laying off workers because there’s no demand for new buildings.
What we can’t know is how widespread this problem is across India.
Mumbai, after all, is one city. However, it would not surprise me in the slightest to think this is more widespread than not.
Hmmm. All around the world, low interest rates and cheap debt have financed a construction boom.
In the next 12-24 months, I imagine we’re going to find out if the demand is really there to absorb it all.
Does this mean you have to bail on stocks for an impending doom loop? No. At least, not yet.
It also depends on whether you invest in the index or individual stocks.
For example, I’m tracking a stock on the ASX that — in my opinion — is one announcement away from soaring if it can pull off a prospective deal.
You’d be mad not to be in the market to take advantage of this opportunity.
And it can’t be denied that 2019 has thrown up some cracking opportunities in the market all over the place.
This is consistent with market history: The final stages of a bull market can be the most profitable, even if economic signals elsewhere may be weakening.
Consider the mindset of the average Australian investor right now.
The government was returned to power and kept the status quo in place.
The federal budget is in reasonable shape thanks to the price increase in iron ore.
The property market appears to be improving. Deposits rates are falling and making dividend-paying stocks more appealing.
All this combines to draw cash into the market.
Indeed, an economist called Chris Richardson says there’s ‘heaps of stimulus’ coming into the Aussie economy.
We’ve highlighted some of these positives in Profit Watch over the year.
This could keep the Aussie market coasting for some time.
When a global problem infects local economies…
However, it’s a global shock that would trump these local factors — if such a thing is coming.
The skyscraper curse suggests such an outcome could be in play. The Lord knows there’s enough tall buildings and big projects going up around the world.
I can say this with confidence because I’ve been tracking this since 2014 and have a spreadsheet of them.
The main question is how they were financed — on credit is the danger sign — and whether those that lent the money go into default if the developers can’t pay.
Stay tuned to Profit Watch… The next 12 months promise to be one hell of a ride.
PS: I wasn’t kidding about the potential of my latest stock recommendation. More to come on this over the week!