Download A TIMELY ALTERNATIVE REAL ESTATE INVESTMENT: Land for

WHITE PAPER
A TIMELY ALTERNATIVE REAL
ESTATE INVESTMENT:
Land for Residential Development
and Its Place in a Balanced Portfolio
Sponsored by The True Life Companies (TTLC)
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ALTERNATIVE INVESTMENTS are commonly
defined by what they are not. They’re not
one of the three traditional asset classes of
stocks, bonds, and cash. Instead, alternative
investments include a wide array of nontraditional assets, from fine art to financial
derivatives. Gold, oil, commodities, REITs,
hedge funds, real estate, and private equity
are all types of alternative investments.
Mark Twain’s famous advice is now more
compelling than ever. Scarcity is driving
increasing demand by homebuilders for
entitled homesites—ready-to-build land for
single-family residential development. Major
demand drivers are population growth,
household formation, and—perhaps most
important—a shrinking supply of land ready to
build on.
Alternative investments are typically used in a
balanced portfolio to meet specific investment
goals such as preserving capital, dampening
volatility, defending against inflation, adding
yield, capital appreciation and asset growth.
POPULATION PRESSURE
After US population growth peaked in the
post-war ‘50s at 18.5%, growth slowed but
still has maintained an impressive pace:
13.2% or 32.7 million people during the ‘90s,
and 9.7% or 27.3 million people from 2000
to 2010.i Population growth is the number
one driver for new home demand and thus is
the number one driver of housing starts (the
number of new homes for which construction
has begun). From 1990 to 2006, housing
starts roughly paralleled population growth.
Starting in 2007 however, housing starts fell
behind while population growth continued
its upward trajectory. Housing starts hit their
pre-recession peak of 2.1 million in 2005the highest on record since record-keeping
began in 1959 – then plummeted to a low of
554,000 in 2009.
This white paper examines a particularly
timely alternative investment in real estate:
land targeted for approved residential
development. This niche alternative asset
class complements traditional and alternative
investments to contribute to a balanced
portfolio.
LAND AND LOTS MAPPED AND APPROVED
FOR HOMEBUILDING—A TIMELY NICHE
INVESTMENT
“ BUY
LAND.
THEY ARE NOT MAKING IT
ANYMORE. ”
– Mark Twain
Over the past 60 years, housing starts
generally followed an average trend of 1.47
million annually, however since 2008 the
number of housing starts fell to its lowest
level since recording began, and has struggled
to recover, finally reaching just over 1 million
in 2014.
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Housing Starts and Population Growth
330
310
2,400
290
270
1,900
250
230
1,400
210
190
900
170
HOUSING STARTS AVERAGE: 1.47 MILLION/YEAR
150
400
9
95
1
2
96
1
5
96
1
1
8
96
1
1
97
1
4
97
1
7
97
1
0
98
3
98
1
1
6
98
1
9
98
2
99
1
1
5
99
1
8
99
2
1
00
2
4
00
2
7
00
0
01
2
3
01
2
4
01
2
Source: U.S. Census, http://www.census.gov/construction/nrc/historical_data
HOUSEHOLD FORMATION
Household formation is another key factor in
the increase in housing starts and is a natural
result of population growth. The chart below
shows that household formation slowed
dramatically during the Great Recession
and housing starts followed. As household
formation recovered in 2011 housing starts
began to recover although they have not
caught up. According to the New York Times
on January 21, 2015, housing starts surged
to their highest level since early 2008.
The National Association of Homebuilders
forecasts that housing starts will reach
1.16 million in 2015, continuing the upward
trajectory.
For information on other major factors
affecting the demand for land for residential
development, view our previous white paper
detailing the 10 Economic and Demographic
Drivers Behind the Demand for Homesites.
20,000,000
18,000,000
16,000,000
14,000,000
12,000,000
10,000,000
8,000,000
6,000,000
4,000,000
2,000,000
19601970 1980 1990 20002010
Household Formation Over the Decade
Total Housing Starts Over the Decade
Sources: U.S. Census, http://www.census.gov/construction/nrc/historical_data ; U.S. Census Bureau, Demographic
Trends in the 20th Century; 2010 Census Briefs, Households and Families: 2010.
Total U.S. Population
Housing Starts (000s)
DECEMBER 2014 POPULATION: 319.9 MILLION
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“A I
s
ANOTHER TIME-HONORED REAL ESTATE
TRUISM: LOCATION, LOCATION, LOCATION
The growing demand for homesites is
national, yet more intense in certain locations.
Population growth has been greatest in
the South and West, so those areas have
experienced the greatest growth in housing as
well. A prime example is the San Francisco Bay
Area, where the technology industry employs
a growing number of high earning workers
who can afford to pay top dollar for housing.
One example of how inflation impacts
demand: the San Jose Mercury News reported
that from December 2013 to December 2014,
Bay Area median home prices increased
10.2%, compared to 8.2% nationally.
Similar housing demand patterns are evident
in other Western cities, such as Phoenix, Los
Angeles, San Diego, Seattle, and Denver. The
South also experienced a robust upturn in
housing demand, while the Northeast and
Midwest had slower growth.
Clearly, when it comes to homesites as with
other real estate, where you buy can be just as
important as what you buy. Location, location,
location.
PORTFOLIO ROLE
Investment in land to be mapped for real
estate subdivisions (entitled homesites) in
the right locations can help achieve several
key investment goals within a portfolio. It
becomes a defense against inflation, boosts
capital preservation and of course contributes
asset appreciation, adding value through
the process of obtaining a final approved
subdivision map on the property.
evaluate a range of possible investments
for clients in the current environment,
I believe that residential real estate looks
attractive, both for diversification and for
return enhancement potential.
– Rick Holbrook, Holbrook Global Strategies
”
In today’s real estate markets, land entitled as
homesites can provide double-digit short-term
return potential.
TWO OTHER PROMINENT ALTERNATIVE
INVESTMENTS
GOLD: THE ETERNAL ALLURE
Gold holds a special place in human history
for its aesthetic, symbolic, and economic
values. Today, investors can add gold to their
portfolios by purchasing bars and coins,
exchange-traded funds, futures contracts, or
mining company stocks.
IT’S AS “GOOD AS GOLD”
Many investors are drawn to gold because it’s
a tangible asset with intrinsic value. It’s an
almost universal medium of exchange. And
the supply is limited and growing even more
slowly than in the past. According to Rob
McEwen, chairman and chief owner of McEwen
Mining Inc. as reported in Forbes, “The supply
of gold has been curtailed both through cutbacks
and development projects — so there’s going to
be a gap in production that could be three to five
years long before it’s properly addressed.” In
contrast, the supply of paper currency is easily
expanded by a government printing press.
Gold’s value remains undiluted while the
world’s currencies can fluctuate dramatically.
Thus gold is seen as a safe haven, protection
against economic crises, and a hedge against
inflation.
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BUT IS IT INVESTMENT-WORTHY?
Warren Buffet doesn’t think so. By his
definition, gold is a non-productive asset: it
doesn’t create a product. In contrast, most
common stocks are issued by companies
that produce goods and services people will
buy: food, goods, homes, all the things that
a population wants or needs. Mr. Buffet’s
opinion, as quoted in Forbes, “People will
forever exchange what they produce for what
others produce.” The result is a compounding
growth rate for productive assets. In 1972 the
DOW closed over 1,000 for the first time in its
history, and on December 23, 2014 the DOW
closed at 18,069, its record high.ii Evidence that
supports Buffet’s assertion that “ . . . over any
extended period of time [productive assets]
will prove to be the runaway winner . . . More
important, [they] will be by far the safest.”
VOLATILITY RISKS
Some investors mistakenly think of gold
as an inert asset—solid, stable, immune to
market whims. But gold is fungible. With no
investment dynamics other than supply and
demand to influence its price, gold is a natural
target for speculation that can drive prices up
or down dramatically.
Gold price volatility is also influenced by the
actions of central banks and government
fiscal policies. Political turmoil can often push
gold prices up temporarily—or bring it down.
According to CNN Money, when there were
concerns about Greece and Europe in 2010,
gold prices spiked above $1,900 an ounce but
then subsided to $1,210 an ounce, nearly 40%
below its all-time high.
It’s not uncommon for gold prices to rise or
fall as much as 15% in a 12-month period.iii
Gold prices, in fact, can be more volatile than
commodities.
PORTFOLIO ROLE
Gold is one of the leading alternative
investments—as an inflation hedge. Limited
long term growth prospects and high volatility
argue against expanding that role.
OIL: IT’S BEEN BUMPY ROAD
Crude oil is the most commonly traded of
all commodities, and arguably the most
important. Oil can be added to a portfolio as
an alternative asset several ways, including
the purchase of futures contracts or exchangetraded funds.
After hovering around $100 a barrel for the
first half of 2014, oil prices per barrel dropped
dramatically, over 42% off the highs in June,
and under $70 in January 2015.iv National
average prices at the pump fell to under $3.00
per gallon after pushing the $4.00 per gallon
threshold earlier in the year.
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TOO MUCH OF A GOOD THING
Falling oil prices are great for consumers and
for the overall economy on the premise that
consumers will use their energy savings to buy
other goods and services.v But low prices don’t
bring smiles to oil producers. The problem is
excess worldwide supply. American fracking
and horizontal drilling have contributed to
that.vi These techniques to extract oil from
shale now produce four million barrels a day—
from practically zero in 2008. As a result, the
US is now the world’s largest oil producer as
well as being its largest oil consumer.
Adding to the surplus, Saudi Arabia and OPEC
have not cut back on their production in an
effort to hold onto their market share.vii
With the growing glut of oil, cities like Midland,
Texas, which burgeoned with the boom and
saw its population grow from 108,000 in 2010
to 140,000 in December 2014, is now feeling
the pinch. As prices fell producers in the
surrounding Permian Basin cut back their rig
count from 570 in September 2014 to below
490, with the expectation that it would fall to
300 unless prices go up.viii
While supply continues upward, demand is on
a downward trend, due in part to the general
economic global slowdown and deflation in
Europe. The International Energy Agency
doesn’t foresee an upturn in the demand
curve anytime in 2015.
IEA Forecast of World Oil Demand
(year-over-year change in million barrels a day)
Latest
June
July
Sep.
Oct.
1.8
1.6
1.4
1.2
1.0
0. 8
0. 6
0. 4
0.2
Source: International Energy Agency.
15
4Q
20
15
3Q
20
15
20
2Q
1Q
20
15
14
4Q
20
14
3Q
20
14
2Q
20
14
20
1Q
4Q
20
13
3Q
20
13
2Q
20
13
20
1Q
13
0
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PORTFOLIO ROLE
The primary motive for investing in oil is asset
appreciation. But for those considering oil as
alternative investment in today’s environment,
the word is “uncertainty.” This at least is the
view expressed in the International Monetary
Fund’s global economy forum of December
2014:
We find both supply and demand factors have
played a role in the sharp price decline since
June. Futures markets suggest that oil prices will
rebound but remain below the level of recent years.
There is however substantial uncertainty about
the evolution of supply and demand factors as the
story unfolds.
THE TRADITIONAL ASSETS
BONDS: STILL A SAFE BET?
Bonds, whether corporate, treasury, or
municipal, have traditionally been added to a
portfolio for two reasons:
1 To provide a reliable fixed income stream.
1
2 To keep a part of the portfolio in a safe
2
place for capital preservation.
5.5
Both reasons are generally
valid still, with a caveat or two.
BONDS
SAFE BET?
VALUE IS BASED ON YIELD
Investors purchase bonds primarily
for income and bond prices are driven
by their yield—the income they generate.
That’s because lower yield means lower
income. Lower income means lower value to
the bond holder. Moody’s, the bond rating
service, reported an average corporate yield
in December 2014 of 4.17%.ix The 30-year
treasury bond rate was 2.44% on January
16, 2015.x As long as inflation rates remain
low, those are acceptable income sources.
However, if inflation rises to 4% or more—as
it did in 2008, for example—the yields after
inflation from those bonds is at best break
even. Factor in taxes and fees, and bond
income loses ground.
As the chart below demonstrates, xi just
because the yield is low to begin with doesn’t
mean it can’t go lower.
Historical Treasury Rates
5.4
4.5
Rate (%)
4.0
3.5
3.0
2.5
2.0
1.5
1.0
.5
0
200520062007 20082009 2010 2011 2012 2013 2014 2015
http://www.freddiemac.com/pmms/pmms30.htm
Time Period
STILL A
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THE LIQUIDITY RISK
Bonds do have liquidity. But remember that
the market value of a bond is based on its
yield. If a bond’s yield rises, the bond’s price
declines. To liquidate bonds that are “under
water,” the price has to fall to increase the
bond’s relative yield. In a thin market, such
bonds will go begging until their prices are cut
severely.
KNOW THE ISSUER
There’s also the default risk—that the
bond issuer will not be able to continue its
payments to you. This risk is slight for large,
well-established corporate issuers except in
times of dire economic crisis. But beware of
junk bonds that promise exceptional yields
and are issued by little known entities. If they
go south, you’re left holding a worthless piece
of paper.
PORTFOLIO ROLE
Current income and capital preservation are
the main reasons to invest in bonds, making
bonds especially suitable for a retirement
portfolio. Investors must remain mindful that
bonds are relatively safe, but not risk free.
STOCKS: THE TRADITIONAL MAINSTAY
Equities—common stocks and mutual funds
traded on the New York Stock Exchange
or Nasdaq—are the backbone of most
portfolios. And for good reason. Equities have
demonstrated persistent growth for over
a century, based on Dow Jones Industrial
Averages and are thus considered the
soundest long-term investment. They’re also
one of the most liquid of all asset classes.
However, picking stocks is a highly
sophisticated skill. So is knowing when to
buy and when to sell. “Market timing”—
attempting to predict the market’s direction—
is very chancy and requires constant
monitoring plus expert knowledge. It’s not
advised for the average investor. Nor is “day
trading”—buying and selling stocks in a short
time frame to try to capitalize on minute-tominute price changes. It’s a full-time job.
THE ADVANTAGES ADD UP
Besides growing value, investing in stocks can
also produce current income from dividendpaying stocks like Apple, Coca Cola, and
Wal-Mart. Stocks offer the flexibility and range
of options to create customized solutions
to meet the goals of most portfolios. Their
liquidity makes stocks’ value readily accessible
with a phone call to a broker or a few clicks on
an online trading site.
A portfolio of stocks in several different
economic sectors can provide balance and
diversity as protection against economic
downturns in individual sectors.
HOW LONG CAN THE BULLS KEEP RUNNING?
Stocks had their steepest annual decline since
the Great Depression in 2008. They bounced
back strongly and have since continued to
grow in value despite continued problems
elsewhere in the US economy. Recent
numbers are evidence of this growth. The Dow
Jones Industrial Average opened at 16,572
on January 1, 2014 and peaked at 18,069 on
December 23. On December 31, it closed the
year at 17,983,xii setting a new year-end record
high. The DJIA had the largest calendar year
point gain in 2013 rising over 26%.
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PORTFOLIO ROLE
Stocks and mutual funds merit their
prominent role in the American investment
portfolio, for their long-term growth potential,
access to liquidity, current dividend income,
and ability to preserve capital in a balanced
asset allocation. In the short term stocks are
very difficult to predict and manage because
of their volatility.
SUMMARY - THE BALANCING ACT
It’s a well-known fact that diversity is the
key to a balanced portfolio. Different asset
classes can be selected to meet different
goals. Traditional assets—stocks and bonds—
typically are considered to meet long-term
goals while commodities like oil offer shortterm returns. An investment in entitled
residential land can fill in the gaps to create
a more balanced portfolio. They offer both
defensive and offensive attributes: capital
preservation and inflation protection as
well as asset appreciation. Careful selection
of value-added residential land in prime
locations offers the potential for double-digit
short-term returns. Current trends in housing,
particularly western US markets, support
the timelines of an investment in entitled
homesites.
Sponsored by The True Life Companies, real estate
investment specialists operating in California,
Arizona, and Colorado. For more information on
our company and investment opportunities, please
visit our website: http://thetruelifecompanies.com/
partnership/ or call Joe Fraser at 925.824.4303.
Please contact us if you have comments on this
white paper or wish to order reprints.
SOURCES
The following organizations, documents, and websites (in alphabetical order) provided material for
this white paper. Please see next page (Endnotes) for specific references in order of appearance.
•1stock1.com/1stock1_139.htm
•about.com/money
•bankrate.com
• Board of Governors of the Federal Reserve System
•Bonds.About.com
•Bondbuilders.co
•CNBC
• CNN Money
• The Economist
• Financial Times
• FRED: Federal Reserve Economic Data
• Forbes Magazine
• Forest Investment Associates
• Fortune Magazine
•goldprice.org
US Department of Census
New York Times and Yahoo Money
iii
bankrate.com
iv
CNBC
v
Forbes
• The New York Times
• Market Realist
•MarketWatch
•Moody’s
• National Association of Homebuilders
• National Association of Insurance Commissioners
• National Association of Realtors
• TradeWeb Data Point
• US Department of Census
• Yahoo Money
•ycharts.com
• US Department of Treasury
• US Energy Information Administration
• US News & World Report
CNN Money and The Economist
CNN Money and The Economist
viii
The New York Times
ix
National Association of Insurance
Commissioners
ycharts.com
US Treasury Department
Resource Center
xii
Yahoo Money
i
vi
x
ii
vii
xi
Copyright ©2015, The True Life Companies, All Rights Reserved.