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They Call Him The “Grave Dancer”

• Buying up busted real estate projects on the cheap,
• Capitalizing on the demand for simple, tangible assets,
• The trend toward monetizing real estate assets and more…

Joel Bowman, very quickly this morning, from the UAE…

With just about everything carrying a ridiculous price tag these days, the humble investor is left wondering, “Is there any value still left in the market?”

In the column below, our very own value investing expert, Chris Mayer, takes a look at one fellow that made his bundle by snapping up “bricks and mortars” on the cheap and flogging them off for huge profits.

Read on below for the details in this Mayer classic…

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They call him the “Grave Dancer”
By Chris Mayer

It was a tag pinned on Sam Zell by an article in 1976 describing his exploits in buying up busted real estate projects on the cheap. The name stuck. It’s a good image for Zell’s style. As Hilary Rosenberg describes in The Vulture Investors, “Zell made his first fortune by tap dancing on the tombs of real estate projects… and later, he waltzed into corporate cemeteries.”

These days, the Grave Dancer is making more money than ever. I’m not sure what Zell’s net worth is now, but I’m sure the figure starts with a “B.” Therefore, when I had a chance to listen to Zell talk about investing, I took it.

On a bright and warm autumn day, a flock of well-dressed financial types made the pilgrimage to hear the old man talk. At the New York Historical Society in Manhattan’s Upper West Side, Zell took the stage in blue jeans and buttoned shirt, sans tie. Zell is 66 years old and very rich, which gets you a free pass to say and do what you want.

“There is a worldwide shortage of income from bricks and mortar,” Zell told us. More and more investors want income. Importantly, however, many of them no longer want income from the traditional sources, such as debt securities - most of which have become problematic since the subprime troubles of July-August.

In the fallout, many surprised investors lost a lot of money in things they thought were safe income-producing investments. Investment-grade securities aren’t supposed to lose value so easily.

An investment-grade rating once was an imprint of quality, like USDA prime beef. Today, the label means little. Mortgage-backed securities once thought beyond suspicion turned out to be disguised junk.

As a result, suspicion lingers around bonds of all sorts, but especially the manufactured variety produced by Wall Street’s packaging experts. No one really knows what’s in these things anymore.

So the demand for simple, tangible assets is high. Investors increasingly want to own old-fashioned hard assets like bricks and mortar, says Zell, not Wall Street’s quirky paper assets.

Zell said we were in the “greatest monetization in the history of the world.” What does this mean? Think of it this way: If you own an office building and go public, offering shares on your property, you have “monetized” the asset. You have realized cash and turned a physical thing into a tradable security. That tradable security is in high demand these days, because people want that steady income from real estate. And the monetization of real estate is the process of meeting that demand.

On a global scale, the trend toward monetizing real estate assets is only just beginning. Take a look at the nearby chart, which gives you a good idea of how much room this trend has.

It shows you the size of publicly traded real estate markets around the world, compared with the total stock of real estate in each region. So you see that Europe has total real estate properties worth some $6.3 trillion yet has only a tiny sliver in the public markets - about 2.8%.

That’s because European countries only recently enacted U.S.-style real estate legislation. According to Cohen & Steers (more on this firm later), “In Europe, in 2007 alone, the United Kingdom, Germany and Italy enacted [such] legislation.” Suddenly, sealed-off private real estate has an open door to public markets.

Cohen & Steer goes on to note: “The sheer size of German private real estate holdings, for example, is extraordinary; a significant amount of these holdings could enter Germany’s public real estate market by 2010.”

Then there is Asia. Parts of Asia, such as Japan, Singapore and Hong Kong, have had U.S.-style real estate laws in effect since 2000. So they are ahead of Europe. But the opportunity remains large. As you can see, only a small sliver of Asian-Pacific real estate trades in the region’s stock markets. Privately held real estate makes up the vast majority.

Zell is bullish on even North American commercial real estate. He said, “You must remember that commercial real estate is a global market. For a euro-based investor, U.S. real estate looks cheap.” As the dollar tumbles, it puts U.S. assets on sale.

Zell is no pie-in-the-sky theorist. He is active himself in Brazil, Mexico and Asia. He owns property and businesses all over the world. He sees with his own eyes the deals still there for the taking. At the conference, he described picking up a Mexican warehouse only 100 miles from the Texas border that pays a 14% cash yield.

The property was in private hands. It’s now in Zell’s hands.

Now, more than any time in the last several decades, investors want steady income from a tangible asset. And the market will respond. The big trend in real estate is the conversion of private real estate into public stocks. Also, rapidly growing economies in Asia and South America push the demand for all things real estate. They need more of everything - from retail space to office buildings to warehouses.

So you have vast pools of money ready to own real estate. (Faithful readers will recall a recent edition of the Rude Awakening, when I examined the growing impact of sovereign wealth funds - those huge piles of cash in the hands of foreign governments). Zell pointed out that we have “only begun to see the impact of sovereign wealth funds on world demand [for real estate].” Zell opined they will be steady buyers.

Therefore, as Zell said, buy bricks and mortar - especially overseas. In this letter, I have one great way for you to cash in on this global phenomenon. In fact, I know of no other publicly traded company like it.

Check in tomorrow and I’ll tell you all about it…

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Rude Endnote : Please send along comments, thoughts, and complaints to the address below. We’re rushing out the door today to pick up the keys to our new place (hooray!) - so we’ll leave it there.

Cheers,

Joel Bowman
Rude Awakening