And the Real Estate Cycle Keeps Turning

BY CALLUM NEWMAN

One of the tasks of the Daily Reckoning is to take a stand for lost causes, fallen saints and other misunderstood misfits. Today I raise our defiant, tattered flag for Uber, a company that constantly operates under the threat of fines and closure all over the world. Their crime? A brazen attempt to deliver you better service at a lower cost than the existing taxi syndicates.

The latest case is in Germany. The Wall Street Journal reports that a German regional court has imposed a national ban on Uber’s second tier level of service ‘Uberpop’. Uberpop is a way for regular drivers and passengers to connect via their smartphones to get around. Uber runs the risk of a €250,000 fine if it continues to operate it while the ban is in place. Talk about the ride of your life.

Here’s the key bit:

‘The suit against Uber in Germany was brought by Taxi Deutschland, a consortium of taxi companies operating in major cities across Germany. “The Passenger Transport Act regulates the protection of drivers and consumers. That can’t easily be overturned no matter how neoliberal the company,” Dieter Schlenker, chairman of Taxi Deutschland, said in a statement.’

Uber is fighting these kinds of cases all over the world. It’s the kind of disruptive business Austrian economist Schumpeter liked to call ‘creative destruction’. These winds like to blow the established house of cards down. But there’s a big problem, at least as far as government is concerned.

No doubt the companies connected with Taxi Deutschland — like everywhere else — paid for expensive licenses from the government to operate. These companies now demand that the government protect what they paid for. The result? Enter the judges and the goons; competition and the consumer’s best interests be damned. Predicting such behaviour is as reliable as clockwork.

Of course, you could say that about what’s happening in Spain and the US right now, too. The big banks and hedge funds are hoovering up what’s left of the cheap property in the former economic blast zones of the real estate-led collapse in 2008. Having said that, it’s not something I went on the record with a few years ago. Colleague Phil Anderson did. You can see why here.

Spanish real estate — down 40% from the 2007 peak — is suddenly the hot favourite. Bloomberg reported last week that Spain’s largest IPO in three years just raised €1.25 billion and within a week spent €740 million to buy commercial property.

Not only that, but this fromBloomberg:

‘Merlin’s IPO capped a dizzying six months of Spanish real estate deals. In January, the New York–based private-equity firm Apollo Global Management LLC bought the real estate unit of Banco Santander SA, Spain’s biggest bank by assets, for 664 million euros. In March, the Madrid-based REIT Hispania Activos Inmobiliarios SA raised 500 million euros from investors, including George Soros’s Quantum Strategic Partners LP and John Paulson’s Paulson & Co. In June, Texas-based private-equity firm Lone Star Funds and JPMorgan Chase & Co. bought a 4.4 billion euro portfolio of Spanish and Portuguese commercial property loans from Commerzbank AG of Frankfurt.’

This is similar to Blackstone Group’s playbook. In recent years, they’ve bought up distressed residential real estate in the US, spending over $8 billion playing the US property rebound.

Now Chinese developers are moving further into the American property market. And according to the Wall Street Journalthis week, they’re not there to buy up old properties, but to build new ones. With China’s property market cooling off, they’re looking to expand their business in the US. All this behaviour is perfectly in accord with the predicted movement of the real estate cycle.

Of course, real estate moves in long trends and time frames. Here in Australia, the RBA released its latest chart pack this week. You can see most of the ‘boom’ action has been in Sydney and Melbourne.

Even so, it’s bringing into the spotlight how much foreign (Chinese) money is driving affordability out of reach of middle and lower income Australia. The Australian Financial Review Weekend edition reports that a parliamentary committee is charged with ‘finding a solution to the nation’s affordability crisis.’

I don’t like the chances of anything changing much. It’s been a problem that for many decades now. It blows hotter and colder depending what time you look. There’s a reason for that. That’s why there’s something familiar about all these kind of headlines. If you go back to the 1960s, 70s and 80s, you’ll find the same story. Really…

But Chinese buyers weren’t around then. It’s seems hard to believe Australia’s finest policymakers cannot solve this vexing problem. Are they sure they really want to? More on the real estate cycle next week. Stay tuned.

Regards,

Callum Newman

For The Daily Reckoning Australia

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