The Valor Blog.
Investment News and Views, Direct from Our Team.

East Coast Australian Property 10 times more expensive than Berkshire

We find ourselves in one of the most extraordinary economic times. Interest rates are negative for around 30% of the world’s government debt. This means that governments are getting paid to borrow money. This has never happened before in history.

For those of you that can’t get your head around this concept of being paid to borrow, you are not alone. Charlie Munger, Warren Buffett’s business partner, and one of the wisest people alive today, referred to interest rates in his comment:

Anybody who is intelligent who is not confused doesn’t understand the situation very well

One thing we can be sure of is that low and negative interest rates have pushed up asset prices to levels that are at or near some of the biggest bubbles in economic history. House prices in Australia are one area that has seen cheap debt flood the market and the net economic rent from these assets has never been lower.

The gross rental yields in Sydney and Melbourne are now below 3%. http://www.macrobusiness.com.au/2016/09/core-logic-rental-yields-plumb-another-record-low/. For those that are not finance experts, the gross yield is before costs that are required to maintain that property. For those of you that are “property experts”, the gross yield is before costs that are required to maintain the property (Most of the property experts don’t understand the economics of what they do). This means the net rental yield is likely now in the 1% range for many properties. We have found a number of properties that we estimate have a net rental yield of around 1.3%.

We find this 1.3% number quite amusing. Not only is it below cash returns, however it is approximately 10 times more expensive than our largest holding Berkshire Hathaway.

Here is Berkshire Hathaway’s cash flow report from last year:

berkshire-2015-10-k-cashflow

We adjust the cash flows for around $6 billion in maintenance capital expenditure and the readjust the cash flows for the $6billion in earnings that Berkshire earns from listed business, yet only includes the dividends not the whole cash flow. We also have projected around 10% growth for next year and our number comes out at around $36 billion per annum. This equates to around $3 billion per month. That is right, Berkshire has owners earnings at around $3 billion a month.

We then look at Berkshire’s cash and with the cancellation of the Mars/Wrigley deal, we estimate that Berkshire has around $80 billion in cash. For a market capitalisation of $355 billion, this means that Berkshire has the following metrics:

Owners Earnings: $36 Billion

Market Cap: $355 Billion

Cash: $80 billion

Owners earning yield : $36 bil/ ($355 Bil – $80 bil) = 13%

So rational investors have a decent choice here. They can buy an east coast Australian property and receive 1.3% owners earning yield or they can buy Berkshire Hathaway at 1/10th the price and receive a 13% owners earning yield.

One of these investments will likely be very difficult over the coming years and one will likely be the gift that keeps giving.