The world’s biggest property investor is loading up on luxury real estate…
The Blackstone Group (BX) is one of largest private equity (PE) firms on the planet. It’s also the world’s largest real estate investor.
Over the past four months, Blackstone has purchased $14.5 billion worth of property. On Tuesday, it confirmed that it will buy Strategic Hotels and Resorts (BEE) for $4 billion.
Strategic Hotels and Resorts specializes in luxury hotels. It owns the Four Seasons in Silicon Valley, the Fairmont hotel in Chicago, and the iconic Essex House hotel in Manhattan, pictured here.
Blackstone will pay $14.25 per share to buy Strategic. That’s 13% more than Strategic’s share price on July 23, when Bloomberg first broke the story of a possible deal.
• This is Blackstone’s latest purchase in luxury real estate…
In May, Blackstone paid $1.25 billion to acquire three upscale resorts, including the Ritz-Carlton in Orlando and the JW Marriot in Phoenix.
Blackstone isn’t getting these properties for cheap. Regular Casey readers know that US commercial property prices are already at record highs. We explained in August that commercial real estate prices are now 18% above their “boom-time peaks.”
• Easy money is pumping up luxury real estate…
The Federal Reserve’s easy money policies are one big reason why the luxury real estate market is hot. Regular Casey readers know the Fed dropped interest rates to effectively zero in 2008, and it has left them there ever since. This has made it cheap for people and companies to borrow money to buy things like real estate, stocks, and bonds. The S&P 500 has gained 124% since the Fed dropped interest rates to effectively zero in December 2008.
Easy money also pumps up luxury real estate in a less direct way. By increasing the value of financial assets like stocks and bonds, easy money makes rich people richer. Last September, CNN Money reported the top 10% of American households held about $282,000 in stocks. That’s over 20 times more than the average middle-class family’s $14,000 stock portfolio.
This means that rich people have made 20 times more money, on average, from the current stock bull market than the average American. A lot of that extra money has flowed into tangible things that rich people buy to preserve their wealth, like luxury real estate and valuable art.
• Speaking of art…
According to The European Fine Art Foundation, the global art market hit a record high last year. It’s now a $54 billion market, thanks to rising art prices.
The market for valuable art is a good barometer for how the rich are doing. Collecting expensive art is almost exclusively for rich people. When the art market is doing well, rich people are probably doing well.
The foundation’s clients tend to have $1 million or more in investable assets. Its client base grew by 15% last year. And the combined net worth of its clients jumped 14% to $53 trillion.
• Is easy money also pumping up the “unicorns”?
You’ve probably heard of the ride-sharing company Uber…
It lets you summon a car with your phone. Within minutes, a driver picks you up and takes you wherever you want to go. It’s quicker, cheaper, and cleaner than most taxis.
Uber is worth a staggering $50 billion, or about $3 billion more than U.S. automaker General Motors (GM).
It’s also the best known “unicorn.” Unicorns are private, early-stage tech companies valued at over $1 billion. They’re called unicorns because it used to be extremely rare for a private start-up to be worth more than $1 billion.
Not anymore. According to CB Insights, a venture capital and angel investment database, there are 133 unicorns today.
Some in the media are comparing today’s unicorns to the dot-com bubble of the early 2000s. International Business Times recently published an article calling the unicorn market “the new tech bubble.”
And Bloomberg Business published an article yesterday titled “Surge in Mobile Startups Valued at Over $1 Billion Signals a Bubble.”
• We like a good bubble story as much as anyone…
But only if the data supports it. And in this case, it doesn’t.
Chris Wood, editor of Extraordinary Technology, says there are good reasons why there are so many unicorns today.
A big reason for the surge in unicorns is that private companies are waiting longer to go public.
In 2000, the typical startup went public within three years of receiving funding. Last year, the median wait time between initial funding and IPO was seven years.
As a result, companies are more mature by the time they go public. Naturally, this leads to higher valuations for private companies.
Chris went on to explain that some small tech companies aren’t interested in going public at all.
Many tech entrepreneurs see going public as an unnecessary burden. SEC approval can take up to nine months. And it’s expensive. A company looking to raise between $100 and $200 million might spend well over $10 million on legal costs, underwriters, auditors, etc.
Also, going public means having to answer to Wall Street. And young, growing tech companies would rather answer to no one.
He added that tech companies that do go public today are making more than triple the revenue of companies that went public in 2000.
In 2000, the average annual revenue for a company that went public was $18 million. Last year, it was $68 million.
• In today’s mailbag, a reader asks about silver…
“Some research companies say to own $2 of gold for every $1 of silver. What does Casey Research consider the appropriate allocation between gold and silver, if any? And is one of these metals riskier than the other?”
Louis James, editor of International Speculator, answers:
There are gold and silver bugs who could write books about why their preferred precious metal is “better” than all others. We don’t want to wade into a religious war, but we do see silver as being more oversold than gold and potentially benefitting from more new industrial uses than gold (especially in the rapidly growing solar power industry).
Louis went on to explain why silver behaves differently than gold.
Most of the silver produced in the world today is as a byproduct of large base-metal mines, and many so-called silver mines are really lead or zinc mines with large silver credits. That makes the silver supply less responsive to demand and creates the potential for flooding the market even when prices are down.
In other words, there really is no way to show that one is better than the other. Even the gold-silver ratio (GSR), which is currently near historical extremes at 76.5, doesn’t predict which metal will do better. It could return to the recent historical norm of 50-60 either by silver rising or gold dropping. Or it could go to nearly 100, as it has in even more extreme cases.
Louis concludes by saying there’s no magic number to stick to when allocating between gold and silver.
So, in terms of portfolio allocation, we treat gold and silver equally. That is not to say, 50-50 gold and silver stocks, but to say, we look for the best of the best opportunities based on either metal, without regard to which kind we have more of.
Chart of the Day
The entire unicorn market still isn’t as big as Apple (AAPL).
We mentioned earlier that there are 133 “unicorns” around today. Their combined value is $492 billion.
To put that number into perspective, we compared it to the value of four well-known tech companies…
As you can see, all unicorns combined are worth more than Google (GOOG), Microsoft (MSFT), or Facebook (FB).
But tech behemoth Apple is still about $150 billion bigger than all the unicorns put together.
Delray Beach, Florida
September 09, 2015
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