The Four G's of Investment in a Hard Asset Economy

Doug Marshall
Market Assessment/Review
Published October 1, 2008

Last Friday I had the opportunity to attend the 3rd Annual CCIM/CID Conference in Bend, Oregon. The guest speaker was Dr. John Baen, professor of Real Estate at the University of North Texas. For three intense hours, Dr. Baen had the audience on the edge of their seats as he explained in layman’s terms what was happening in the capital markets.

His explanation of the current crisis was fascinating, but instead of simply focusing on the problem he also talked about the solution. In every economy, he said, there are opportunities for the savvy investor.

The crux of his talk could be summarized this way: we are at the beginning of a new hard asset cycle, where cash is king and where investing in securities, such as money market accounts, stocks, and bonds will be the big losers.

He talked of “the four G’s” – the type of investments that will prosper in a hard asset economy:

· Gold – precious metals will be a hedge against inflationary pressures.
· Ground – not just land but real estate as an asset class. Bare land is an excellent hedge against inflation but produces a smaller return on your investment than income-producing properties.
· Gas – investing in gas and oil is an excellent investment, but only for those with an understanding of this type of investment.
· Grub – meaning food, i.e., commodities and basic staples such as corn, wheat, etc. These will do well in the years ahead.

Dr. Baen then focused most of his time on how we can identify good real estate investments. Here are some of his thoughts:

Interest rates will have to go up substantially in the years ahead. He cited Alan Greenspan’s book, The Age of Turbulence, as a reference. Those who lock in long-term interest rates today will be among the winners.

Not all real estate will prosper equally. In a “down” economy, apartments and rental housing should do well. As the economy continues to soften, office and retail properties will be likely losers.

In the months ahead, lenders will be willing to make deals on properties in default in order to get them off their books. Those investors who are willing to propose very one-sided offers may be pleasantly surprised by lenders eager to make deals.

Bob Nelson, principal of Pacwest Real Estate Investments, also attended the seminar and did a much more thorough job of taking notes than I did. Click here for Bob’s 6 page summary of Dr. Baen’s talk.

Source:
Dr. John Baen, Professor of Real Estate, University of North Texas