State of Play: Advantage from Adversity

Hi there, and welcome to our State of Play. So we’ve had a few economic updates, nothing unforeseen, nothing totally disastrous. In fact, everything’s playing out the way that everyone always expected. So, the Australian Bureau of Statistics released retail trade figures yesterday, and retail trades suffered its worst slump since collapsing when the GST was introduced. It collapsed 17.9% in one month, in April. And it had actually jumped eight and a half percent up in March because of panic hoarding when everyone was doomsday prepping and buying toilet paper.

So this actual collapse, the last time we saw something that big, and it wasn’t as big, by almost half, was a drop of 10.6%, and that happened in July, 2000 after the GST was introduced. The RBA from this forecast that consumption is going to drop 15% by June. Consumption is what we spend. So, retail buying, money in circulation in the economy. And then it’s going to be down 9% by the end of the year.

And obviously that’s going to affect jobs, that’s going to affect wages. They also released payroll data from the ATO, and it showed that in seven weeks until mid May, so from March until May, 950,000 jobs were lost from the economy. So we haven’t seen the damage of that cause of the job keeper allowance, but we can see that we’ve had the worst fall since the year 2000 when it comes to retail spending and consumption. So we see it there off the charts and that blip is because of GST, but we see it here. That’s because the whole economy shut down. And this just shows the difference. So big jump and big differences there.

Where’s the smart money going? I always say, follow what the successful people are doing. Model yourself off the Warren Buffett and the big investors and the big institutional investors. So private equity are now looking at hoarding cash to buy distressed assets. So at the moment, sellers are discounting property about 5% private equity firms have said, whereas bidders, people buying are wanting to buy 20% below.

So at the moment there’s a standoff or a freeze on doing deals. No one’s transacting because sellers are going, look, we’ll meet you by discounting 5%. Buyers are going okay, we’re not going to pay any more than 20 cent below market. I’m talking the big end of town. So CBRE agents who deal with these multi mega, a hundred million dollar deals have said the mantra for anything has gotten that has gotten started, so any deal that is in the pipeline but no one’s signed a contract yet is delay, defer and in many cases, renegotiate.

Private equity firms though have about 328 billion US dollars. So about half a billion Australian dollars ready to buy real estate.

So that is where the smart money is going right now. The Blackstone Group, which is one of the biggest private equity firms in the world and Brookfield Asset Management, so they’re the big guys to watch. They’re looking for bargains. They’re looking at Europe. So these are global buyers. In Europe transaction volume, so deals actually churning over has dropped 65%. So as we’ve seen with residential real estate, so it’s true at the big end of town. No one’s doing their deals. It’s a standoff. They’ll just wait and see.

In the Americas and in the Asia Pacific region, deal volume has declined by 25 to 35%. But Blackstone have $538 billion in assets. So that’s property holdings that they’ve got now. And they’ve said, we’ve started to see some rescue situations, but distress has a while to play out. Their president said, so it takes time. It’s a waiting game.

And unfortunately time does the work. So people have so much money to stay afloat and only so much money. And once that runs out, it’s gone. So they’re treading water, keeping their heads above water. We’ve got gov government stimulus. We’ve got things like freezers on bankruptcies of winding up of companies and insolvencies. So we’ve kind of got, like they called it, like an induced coma or a freezing of the economy. A hibernation was the official word that the government used. That is going to come to an end.

So Brookfield has said that they’ve got $60 billion and their CEO said that’s ready to deploy globally as opportunities arise. So the one thing, the takeaway from this is that, and this is the CEO of Brookfield. They said it reflected what really matters now in their business is liquidity, liquidity and liquidity in any market that is like this market.

And what we’ve been saying all along is build a war chest, build a war chest. Cash is King liquidity means ready cash and money because there are going to be huge buying opportunities. And that’s really where money is made. People who buy in a rising market or the top of the market, they’re the ones unfortunately with too much debt who lose their ship when the market falls as this one is and will fall further. And it’s those who buy into the market that have the greatest gains, because those in the know and the economists and the big banks are saying that, yes, there’ll be a lot of impaired loans. They’ve got a lot of cash reserves aside for that and APRA have agreed to that. So they’ve got money ready to cover themselves for distressed assets and people not making their payments. And at the end of the day by 2022, the market will be back to normal.

So this is the time to get really, really active. You know, when you hear people say, Oh, my grandfather bought the family home for a thousand pounds back in 1960. And we think, Oh, I wish I could have done that now. This is going to be one of those times. This is a historical moment that we’ll look back to and say, Oh, well that was during COVID 19. And our grandchildren will say, Oh, they were lucky, they bought during COVID-19. So our predictive modeling from our big banks who’ve got that money in reserves is that the economy will shrink by 7.1% this year and 0.8% next year to bounce back by 2.3% in 2022.

So over this period, worst case scenario, Commonwealth Bank said that the property market would fall 32%. So that’s stress testing, banks stress tests. They go, what if the worst happened?

What if half the economy lost their jobs? What if JobKeepr ran out? What if the government wouldn’t bail anyone out? What if there was blood on the streets type thing? And then they go, okay, whine that back. What if the economy didn’t contract that much and it got better by next year. So there are two extremes at Commonwealth Bank where 32% worst case scenario and 11% fall in property prices, best case scenario.

West Pack saw it as 15%. NAB saw it as 30% at a worst extreme and 10% otherwise. So they’re all around the same Mark. But what it means is property market will fall. We probably won’t get another opportunity like this when it comes to distressed assets and distress property. Land sales slumped as well. So recent data showing that residential land activity that’s vacant land or house and land packages are down. So more in Sydney than anywhere else, but also Southeast Queensland. So all of those tracks of land and Greenfield lands that have been subdivided, people are giving them back to developers and developers are having to relist stock. So people have pulled out of contracts.

And we can see on the far right there, that stock that’s relisted as a percentage. So massive, massive percentage for there and percentage change. So a market that’s really hurting. And job losses in the construction industry are more and more prevalent. So this construction industry was okay because jobs in the pipeline needed to be finished, but as those jobs are finished, there’s no new projects. And so what we’re seeing and indeed in our community at the coalface, builders, tradies, even for renovations, they’re really, really negotiate because it’s a demand and supply issue. Fewer people are building, fewer people are doing work and improving their homes and the tradies are hungrier.

So you’ll be able to negotiate really good deals and contracts in this month. Good Sydney and Melbourne property prices fell according to CoreLogic data on a month to month basis. So we said a month ago that no damage had been done in the property market. In fact, everyone was on the sidelines at Mexican standoff. So it meant that no transactions meant no records, nothing had changed. The market was still holding steady. Now people are starting to move, starting to sell their properties and starting to discount. So this is the beginning of the slide downwards.

The other thing that’s happened in the world is that what they call the Five Eyes, they call it the Five Eyes because after world war two Canada, New Zealand, Australia, the US and the UK had an Alliance where we would trade information, so secrets basically. And that alliance has stayed true to this day. And a report recently came out in relation to what’s happened and Australia, China relationships being at the heart of it and the Victorian government. So there’s a belt and road initiative where the Victorian government late last year did a deal with China to invest in infrastructure and building and trade in that respect. And there was an investment roadmap due to be signed now middle of 2020, and now relations have soured.

So Mr. [Palace] came out in parliament, criticized the Morrison government and said, how dare you question China and call for an inquiry into COVID-19. And of course the Australian government did that. And China arguably, whether it’s cause and effect is unknown, but China then put an 80% levy or a tariff attacks on our Bali exports, which pretty much destroys that industry. And parliament is now saying, well, where’s the Victorian government getting the $24 billion that they need for their infrastructure projects and what’s in the pipeline to deal with COVID-19 blow outs? Is it from China?

So big playing out in the global economy and Australia needing to do couple and have a plan B in relation to China. So that group of the Five Eyes because the initial report after world war two was between the five countries. And it said for your eyes only. So that Alliance has been called the Five Eyes, but the Henry Jackson Society yesterday released a report called Breaking the China Supply Chain, how the Five Eyes can decouple from strategic dependency. So looking at where we’re vulnerable, the Five Eyes countries have pushed for hyper globalization after world war two. And what’s happened is that China has accumulated a dangerous degree, disproportionate favor from many of the contracts we have. So we’re strategically dependent on China on importing things and exporting things across 595 categories of imported goods.

So Australia is the worst in terms of dependency from the Five Eye countries. So the US is at 414, categories of goods, Britain at 229. What it means is that if we fall out of favor with China like we have, then we need to have other plans for things that we need to buy and sell.

We haven’t developed that. So the Australian economy is suffering and may suffer further if we sour our relationship with China and no foreign students, no tourism, no trade. It’s going to have a massive impact on our economy and exacerbate what’s already a problem.

So we’re dependent on them for 167 categories of services for critical applications. So things like magnesium that we need desperately in many industries in Australia we get from China. 35 categories of goods essential to technologies in… So they’re calling it the fourth industrial revolution, but basically internet technologies and magnesium is essential for transport energy construction, as well as pharmaceutical supplies.

So what the report says is basically all of the Five Eyes nations but especially Australia, very vulnerable to global risk and relationships with China. So if we’re the underdog in a negotiation and it’s going to affect our economy, we have to have a plan B or in negotiation, they call it a BATNA, a best alternative to a negotiated agreement.

So, there are some gray clouds hovering over the Australian economy. And I think just coming out of shutdown and getting back to normal, there is going to be a new normal, and there are dangers there, but there are also huge opportunities in buying into a down market. And if you want to know more about distress, property and distressed assets and opportunities, they’re like those big private equity firms are taking advantage of now, and you’re building a war chest, or even if you want to do it without any money, I’m holding a special briefing on that tonight.

So I’ll put the link in the comments section there for anyone who’s interested in buying into this downmarket of property and this tidal wave of distress properties that are hitting the market now. There’s certain strategies that you can apply to do it without any of your own money, to buy well under market, to source the deals and to negotiate them. So I’ll be sharing that tonight. And the link for that is in the comment section.

So, that’s it for our State of Play today. And as always, please share this with friends, with family, I’ll share the slides to this and add our COVID-19 page on the DG website, top right. There’s a tab for COVID-19. We’ve got a lot of resources there. Ask any questions. I’m happy to give feedback and input, and let’s all just get through this as a community. Tag this, share it with your friends. Remember to hit the bell and subscribe, and you’ll be notified of all of our live streams.

As always, take care, stay well. I’ll see some of you tonight on our live special briefing and otherwise we will talk next week in Tuesday’s State of Play. Have a great weekend.

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