Blog: You, us, everyone

The other day, I came across an article about the ever-biggest margin call to come. It was argued that value stocks, bonds, and properties would correct by law of economics; …. Hmm, this sounds like a big time, real alarming story! Let’s go to the facts.

The Central Bank actions, aka monetary tightening, has triggered a tsunami of wealth destruction across all markets. Solely for Wall Street, the accumulated damage since the top of the market last year is amounting to over $10 trillion. It is a fact that some traditional assets have ballooned to levels not seen before. Into this group belongs real estate, and the largest group of industrial assets are Prologis, Duke Realty Corp., and CenterPoint Properties, amongst others. Their presence is across the globe, and their business model consists of making square feet available  in office buildings, industrial facilities, datacenters, and such. Yet, some of them have already corrected by more than 60% on the back of interest rates rising, while the average occupancy rates still oscillate around 95%, which in absolute terms means that they are fully booked. More importantly, their pricing power is almost absolute as the occupier has almost no opportunity, in the absence of any alternatives, to move to a different location. So, did they correct simply by the fact that interest rates went up or is the present value destruction a global margin call?

The historic rental growth is around 9% p.a. while the annual supply of new industrial assets stays in range. These new deliveries are centered around EV projects. By 2025, Prologis will, for instance, generate about 1 gigawatt of solar power that it makes available to EV vehicles on their properties. Charging an EV vehicle while loading/unloading with its own produced electricity sounds just another enticing complement in an already perfect business model.

While the market will remain volatile for the next quarters ahead, we believe that real estate companies can correct temporarily another 15% to 20% from current levels. Yet, and once the margin call is done, real opportunities like PLD become almost a no-brainer. At some point, the market will find itself in the new equilibrium and holders of industrial assets will benefit from this.