Island Real Estate... the Ultimate Long-Volatility Play? (w/ Raoul Pal & Hugh Hendry)
HUGH HENDRY: For me, like you so following in your footsteps, you play a view on this. For me, last year, I borrowed 5 million euros, 20 years fixed like 2% and 2% was the wrong figure. It should have 1.3%, but I was like, whatever, hit me, hit me, hit me. Let me just say that again, I borrowed 5 million euros to buy a property in St. Barts, to buy a pilot like to, believe me, it's a much bigger investment and a French bank was willing to lend me at fixed. That's very reminiscent. That is assuming your world, that's a world where gold is going to go to 3000, it's going to go to 3000 because it's going to be difficult but there's enough financial lubrication that it won't be the 1930s, but it is going to be a world of zero interest rates for a long time. I just don't think that the banks are as smart as that. I think they've got that wrong. I think they've got that wrong like their German cousins after the First World War. Germany was devastated clearly after the First World War, so was Japan after the Second World War. Yet, within 15 years, Japan was cut very quickly, [?] was like approaching the income levels of the West, maybe 15 to like 20 years, 20, 25 years. It was there. The fact that you're decimated, that I hate that word decimated, you're destroyed by war, financially, your central bank tells you, your banks are bankrupt because they own worthless pieces of paper. Actually, as a central bank, you can say, okay, give me that worthless thing and I'll give you $100 million for it. They're like that is not much. Thank you very much. They're like, you give me 20% of Hitachi or Toshiba or Sony or whatever. Presently, it's worthless, but give it to me and I'll give you this worthless piece of paper called the yen, and Japan reemerged. The same dynamic was happening in the German economy after the First World War. Then like, no, you could come in, you have to be wise, you have to buy the right asset. You've been graded. You've reached this buy, like buy something tangible and real that throws off cash. You've got a lot of data, it throws off cash in good times or bad times. I don't like cosmetics, people get depressed and they have to look really good in depressions and they have to look spectacular when life's great, I don't know, but it throws off cash. Then you sit down, and you say to the bank, hey, hit me, hit me, and the bank's lending you 5 million, 10 million, 15 million, 20 million for 20 years fixed because it sees a world where interest rates are just-- they're anchored and they're never-- if anything, they're going bore. I want to be the other side of that. Here in St. Barts, I developed-- I'm going to share some of the properties and the projects that we have, but we do Uber luxury, the Uber creditor states. They're the guys who the princes of the world, who own the world come in and there's no point having a private island. If you're going to have a private island, no one can see just how amazing your intellect, how amazing your courage is. You got to come here on New Year's Eve is the greatest concentration of the most grotesque giant super yachts in the world, and it's like a caravan park. I've been on these things. I'm like, I could pay me to stay on these things. I get on very, very-- and again a bit like gold, they don't want any more construction on this beautiful island. They're making-- each year, they change the civil code, or the code of [?] and they make it harder and harder to build, to develop. My first project, we did 550 square meters of internal space on an acre of land. If I did that project today, I would get about 300 square meters. This thing that was unique. That's a scarcity value, one of a kind, if anything is diminishing, in terms of the supply is diminishing, and then a new currency risk, this is a euro asset. I'm funding in euros and funding it-- the next deal, oh, my bank-- so the bank calls me, I can't really say it, but I feel like I'm having good vibe. The bank boards, and I'm just thinking like the French government, they want to help, like they want to help me. RAOUL PAL: They want to give you a break on your mortgage? HUGH HENDRY: They want six months break and like, what do you think? I'm like, yeah, why not? [?] Then I got an email. It's like from, again, from our friends in the government. They're willing to make a loan. They will lend you 20% of whatever your average loan balance was last year. No capital repayments, an interest rate of 0.25% and probably with the right to extend maturity. Is that something you'd be interested in? I was like, yeah, that's something I'd be interested in. I get to live when we have a hurricane, when we have a virus, I get to live in these [?] policies. Know that these are commercial projects. This is not my real life. I get to own these exclusive rare assets, I think funded at the wrong rate. Then the ownership cost to me is zero because this is the longest holiday [?] season in the world. We get 26 weeks a year, and so the clients pay for the financial servicing of the property. RAOUL PAL: There's no additional yield above it because it's financed but it's free carry essentially, including maintenance. HUGH HENDRY: The first few trades and the post of carry was insane. Before the virus, we bid away the post of carry and we've gone to break even in everything. Maintenance, everything. I think the virus is going to-- the virus and if I get assistance from my friends in the French government with additional loan facilities, I could sit it, because my dream is-- I think I put something out saying, I'd like to do a property fund here. Very hard to do but my idea is, I want like very long, very patient money. I want to be the central bank of this tiny little island, so that when there's a liquidity issue, and someone's got to sell something, and they go to sell something at the wrong price, I make the price and I create the market. I'm still thinking about it, but there's just a chance that the virus changes. We might be able to restore post of carry back into that.