Inflation and Geared Commercial Property

T

The Accountant

New Member
Does anyone care to comment on the benefits of gearing commercial property with good tenants and annually reviewed CPI adjusted leases.

If we are heading into an inflationary spiral caused by excess fiat, won't the value of the property rise whilst the debt stays flat? - assuming you fix your interest rate.

In theory the bank will lose out and pay off the property for you as long as the tenants don't go broke.
 
Well, it might be pointing out the obvious, but you're assuming that mortgage rates will go up with the CPI. I'm not convinced that would necessarily be the case for several reasons. Firstly, the CPI is only one component of mortgage rates - cost of funding/capital and a bunch of other things are also considerations. Secondly, the CPI can be manipulated for political reasons and the banks aren't necessarily going to stick to the official figures if it's going to lose them money.
 
The Accountant said:
Does anyone care to comment on the benefits of gearing commercial property with good tenants and annually reviewed CPI adjusted leases.

If we are heading into an inflationary spiral caused by excess fiat, won't the value of the property rise whilst the debt stays flat? - assuming you fix your interest rate.

In theory the bank will lose out and pay off the property for you as long as the tenants don't go broke.
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whats this an accountant asking for advice on finance? . Is this a test ?
 
The Accountant said:
Does anyone care to comment on the benefits of gearing commercial property with good tenants and annually reviewed CPI adjusted leases.

If we are heading into an inflationary spiral caused by excess fiat, won't the value of the property rise whilst the debt stays flat? - assuming you fix your interest rate.

In theory the bank will lose out and pay off the property for you as long as the tenants don't go broke.
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I highlighted the most important bit in your post above. No issue with the rest of it.

If we go into a long deflationary depression you'll be screwed holding all that debt. Why not hedge your bets, be debt free and stay as liquid as possible (although if you own houses outright you're laughing whichever way this goes).

Not to mention the fact that you will be buying at the top of the market, so you better hope you're right.

A bit of food for thought:

http://boombustblog.com/reggie-midd...on-inflation-or-stagflation-you-be-the-judge/

http://keynesianmania.com/?p=95

I would personally see a period of stagflation (which we're in now), then a deflationary depression, followed by a recovery with high inflation as the money multiplier picks up. All of this assuming there are no major currency collapses, political upheavals, wars, large tsunamis, Godzilla doesn't return, etc. Times are uncertain and nobody really knows what will happen, so hedge your bets. Hold cash and be debt free in case of deflation, have fully owned hard assets such as houses and PMs for inflation. And enjoy the current bull run in equities, it's got a while to go yet.
 
Even better if rates don't go up. The bogus CPI numbers will drive the rents up and if rates are steady then the yield will just get better.

Big problem would be deflation - nobody has real money to pay for buildings so values fall through the floor.

At the moment you can get 10% yield on some commercial properties - borrow at 7.8%. Leave the debt outstanding and use the free cashflow to buy more PM's.

Make sure that you don't over extend and have another source of cashflow to cover interest payments if vacancy occurs.

I believe that once PM's have hit a peak, a bit of Commercial property for steady cashflow will be very handy!
 
Hi renno,

No-one said Accountants have a mortgage on all the knowledge. I'm with wave - hard to tell how the economics will pan out! The deflation thing scares me, but I expect the deflation would be quite short-lived as the Reservists crank up the presses then inflation could go crazy - leaving PM's and Geared Commercial property as the winners.
 
The Accountant said:
Hi renno,

No-one said Accountants have a mortgage on all the knowledge. I'm with wave - hard to tell how the economics will pan out! The deflation thing scares me, but I expect the deflation would be quite short-lived as the Reservists crank up the presses then inflation could go crazy - leaving PM's and Geared Commercial property as the winners.
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yeah its all a big guessing game all you can do is jump in & swim like crazy until all the signs start to appear then get out before the sharks get ya
 
Great article Wageslave - thanks. That Rich Dad stuff can be dangerous alright too much debt could be poisonous if long-term deflation or depression set in at some stage in the future.

Seems kind of sureal talking about that stuff at present - everything feels peachy in Oz right now but if China comes off it could turn rapidly.
 
Everybody always talks about china tanking . I just cant see it happening just because a few countries bite the dust doesnt mean china will tank . The US could go under tomorrow & it would hardly make a blip on chinas radar.I have imported a fair bit of gear from china & talk to the sales people from lots of companies& the US is a small buyer compared to the rest of asia south america India The middle east Europe Russia etc .They arent going under in a hurry if it does slow down it will be gradual over the 20 years .Thats why they keep the RMB so cheap they arent stupid
 
The Accountant wrote:

leaving PM's and Geared Commercial property as the winners
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Unless you need to sell your PMs to get cash and then incur CGT, so in fact you're left with less in an after-inflation, after-tax basis. :(

That's assuming that at the time of selling, your PMs have only gone up by by whatever the "real" inflation rate is.

Zargor
 
The Accountant said:
everything feels peachy in Oz right now but if China comes off it could turn rapidly.
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This is what I'm most worried about too. As one of the few places in the world still seeing true across the board inflation and a massive asset bubble, China is almost certain to be in for a depression and it is going to hit us hard.

http://boombustblog.com/reggie-midd...t-china-will-follow-1920s-us-and-1980s-japan/

http://mpettis.com/2010/02/never-short-a-country-with-2-trillion-in-reserves/ <- I found the comparisons to US in the 20's and Japan in the 80's fascinating

Sorry for spamming you with Reggie Middleton, but he makes his points well.
 
The Accountant said:
In theory the bank will lose out and pay off the property for you as long as the tenants don't go broke.
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Not sure about your area but around here, outskirts of Melbourne, more and more shops and factories have to-let/for sale signs than I can remember for more than 20 years.

The signs are, in my opine, ominious for commercial real estate.
 
renovator said:
Everybody always talks about china tanking . I just cant see it happening just because a few countries bite the dust doesnt mean china will tank . The US could go under tomorrow & it would hardly make a blip on chinas radar.I have imported a fair bit of gear from china & talk to the sales people from lots of companies& the US is a small buyer compared to the rest of asia south america India The middle east Europe Russia etc .They arent going under in a hurry if it does slow down it will be gradual over the 20 years .Thats why they keep the RMB so cheap they arent stupid
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Don't think this is correct renovator. See http://www.uschina.org/statistics/tradetable.html, Table 8. The US is clearly on top as an export destination, and I think if you tracked the EU as one entity it would be in the top three. When two of your largest trade partners are going through deep recessions, something has to give. Their last stimulus is running out and they are making moves to deflate the credit bubbles they are experiencing. Not sure why "this time is different" in China.
 
Well if China tanks, so does Australia...I wouldnt be buying any more Silver if the AUD drops to 70cents....
 
That Dateline story on the 64 million empty apartments in China was pretty conclusive. China is a planned economy capable of excesses far above a free market economy. Put this together with a gen y who are educated, have 24/7 world wide communication available and who are getting impatient at the slow pace of their material advancement. I reckon the place is facing politiical instability over the next decade. How about if the Chinese need to cash in some of their US debt and this sends their own currency North - their export prices go up, demand falls away and that comes straight back to us in the land of Oz. I reckon BHP and RIO are toppy!
 
be nice to see some recent figures those are from 2009 .The people i talk to recently say the others buy more than the USA so thats where my info comes from.The US is probably much lower lately& i forgot africa aswell they have come online to buy a fair bit. this has been in the last 18 months. & i dont even see russia africa the middle east south america on those charts & the only nordic country is the netherlands they have expanded their markets since then . I can only tell you what they have told me & i believe them because they do the deals by the container load
EDIT I also know that not all graphs are correct for the simple reason is that i have sent around 40% of the money into personal accounts not company accounts ... Like i said china isnt stupid
 
The Accountant said:
If we are heading into an inflationary spiral caused by excess fiat, won't the value of the property rise whilst the debt stays flat? - assuming you fix your interest rate.
Click to expand...

Look at the US. They have printed Trillions to try and get asset prices to inflate. However the result is that printed money has flowed into commodities and made everyday living more expensive.

Despite printing TRILLIONS they have inflation of necessities and deflation in consumer wants.

Govts should not monetize debt nor should they run deficits because the US example has shown us that they cannot control where that new money goes.

They've added $10T to their debt since 2008 and will probably add another $2T or so over the next 12 months. Their entire mortgage debt is something like $20T. They could have paid HALF off everyone's mortgage and treated the cause. Instead, they treated the symptom and gave the money directly to the banks which solved nothing.

The theory of 'trickle down economics' has just been blown out of the water by the US and i think that's pretty easy to see. Unemployment has gotten worse. Living costs have increased. Average Joe defaulting on their mortgages at record pace. Record bonuses to bankers.
 
Australian property is the last real estate market in the world to correct and the signs are that a correction is imminent.

- Household debt is at an all time high.
- Investment Banks are using newly printed fiat money to bid up commodity prices
- Rising commodity prices are driving inflation around the world
- Utilities, insurance and taxes are all being raised in Australia, increasing the cost of living
- The RBA is sitting on the trigger to fire off more interest rate rises to slow down the mining boom
- With declining realestate, high debt levels, rising cost of living & increasing interest rates no one has/will have money to spend on discretionary items
- Small businesses are not/will not be rising wage rates, so income will fall further behind inflation
- Retail businesses will/are going to the wall (take a drive around Melbourne)
- Commercial rents will decline or buildings will be vacated and left empty, driving declines in commercial property values
- Rising rents is inelastic when people have no money and the rates and utilities and taxes are also rising.

Property owners are competing with governents and utilities for the rental dollar. I was looking at offices yesterday and some places the outgoings (rates & bills) were 50% of the rent! That's not to mention car parking and the insane fringe benefits tax associated with parking your car. However, Newcastle is pretty insular with the coal industry and its welfare oriented economy (it's either big mining, big government or servicing big mining and big government) so things may stay better for longer there. Unless Gillard applies the Carbon Tax to coal exports (it will be burnt after all) and adds an extra dollop of resource rent tax on top.

Australian property is a train wreck in progress. We're getting a wobble up, the track is increasingly bumpy, but the wheels haven't fallen off quite yet. But it will happen faster than anyone expects, especially if foreign speculators slow down or stop buying (I'm guessing you don't see the direct effects of this in Newcastle, only the second order effects with cashed up Sydney buyers after selling to Chinese crony communists).
 
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