Are we facing 2008 Mark II? Investing in hard assets for desperate times…

Philip Gilbert 

Aragonese Consulting Ltd

Almost exactly 9 years ago my wife and I left for 2 weeks holiday in southern Italy. At the time, I was working in the global markets division of a global investment bank. The signs weren’t good, and my immediate boss said have a good holiday and remember, ‘something bad always happens in September’.

By the time I returned, 2 weeks later, Lehman was bust, as was Washington Mutual, Fannie and Freddie were in government conservatorship, AIG on life-support, Merrill was saved by BoA and, in the UK, HBoS had failed and was to drag down Lloyds, and RBS, only recently strutting its stuff as the world’s biggest bank, became the world’s biggest bust! Me, I was sunning myself on a deckchair, perversely I was gutted to miss all the excitement!

Where, or, if the crisis ever stopped, no one is sure, but the FTSE bottomed below 3700 around the 2^nd March 2009. Today (25^th August) it is double that, 7423. The following graph shows the bull market that followed

The problem has been that for many it hasn’t felt like that; we have seen deflation followed recently by inflation ahead of Bank of England targets, 9 years of record low interest rates, and the biggest asset bubble in history being inflated. In short, the rich have got richer whilst the rest of the population has got poorer. Oh, and then there is Brexit, and maybe stagflation……..

‘It’s going to be the worst in your lifetime — my lifetime too. Be worried’

So strange has the investment situation become that one commentator remarked, for years we bought bonds for income and stocks for capital growth, now it’s the other way around. The current dividend yield on the FTSE is 3.8%, ahead of any investment grade bond; even Greek government 10-year bonds yield only 5.4%.

In essence, many of the indicators are pointing to something going wrong. Jim Rogers the well-known investor and commentator predicts the worst crash in our lifetime. The following is from Business Insider June 9 2017; http://uk.businessinsider.com/jim-rogers-worst-crash-lifetime-coming-2017-6?r=US&IR=T

Rogers: It’s going to be the biggest in my lifetime, and I’m older than you. No, it’s going to be serious stuff.

We’ve had financial problems in America — let’s use America — every four to seven years, since the beginning of the republic. Well, it’s been over eight since the last one.

This is the longest or second-longest in recorded history, so it’s coming. And the next time it comes — you know, in 2008, we had a problem because of debt. Henry, the debt now, that debt is nothing compared to what’s happening now.

In 2008, the Chinese had a lot of money saved for a rainy day. It started raining. They started spending the money. Now even the Chinese have debt, and the debt is much higher. The federal reserves, the central bank in America, the balance sheet is up over five times since 2008.

It’s going to be the worst in your lifetime — my lifetime too. Be worried.

Now for the good news; governments don’t go bust; Ireland, Iceland, Portugal had to be helped but survived; Greece is still there, so is Argentina. The moral, look for investments where there is government involvement. Perhaps not direct investment into government bonds, but something where the lease / off-take agreement has government ‘support’.

There are two areas I wish to highlight; social housing, and care homes. Both opportunities are, in many ways, a sad indictment on the society we live in: people financially and physically unable to house and look after themselves; the other the result of over-stretched under-funded health budgets and unfavorable demographics. People are living longer, and families are smaller, meaning fewer people are working, supporting more dependents, and contributing less tax revenues to governments already running budget deficits.

I have written about social housing before, see; ‘Didn’t sell in May?’ There could be an alternative for investors seeking income’, DIY Investor, 21 June 2017, today we will focus on opportunities investing in Irish care homes.

‘According to a report commissioned by a private nursing homes group there aren’t enough beds to meet demand and it is only going to get worse.

Tadgh Daly, CEO of Nursing Homes Ireland, says there will be a shortfall in nursing home beds if the Government does not form an action plan and invest in more infrastructure.

Speaking on RTE’s Morning Ireland, he said that there is a ‘dramatically ageing population’ and that in the next seven years, the population over the age of 85 is to grow by 46%.

Source: http://www.thejournal.ie/nursing-home-beds-ireland-shortage-1310090-Feb2014/

In response to this the Irish government has created The Nursing Homes Support Scheme (‘NHSS’), also known as the ‘Fair Deal’ scheme. This is a scheme of financial support for people who need long term residential care services.  Under the Nursing Homes Support Scheme, eligible nursing home residents will make a contribution towards the cost of their care and the Irish State will pay the balance.

The NHSS is currently administered by the Health Service Executive (‘HSE’) in line with the Nursing Homes Support Scheme Act 2009 and within the resources made available for the NHSS.

‘I leave for 2 weeks holiday in Italy; be afraid, be very afraid……’

The scheme covers long-term nursing home care only. The Act defines ‘long-term residential care services’ as maintenance, health and personal care services. The Department of Health has further clarified that this includes: bed and board, nursing and personal care appropriate to the level of care needs of the person, laundry service, and basic aids and appliances necessary to assist a person with the activities of daily living.

There is a set level of funding for the scheme each year, so there may be situations where a person’s name must go onto a waiting list until funding becomes available.

The existing care homes have, in the main, been found to be inadequate, and certainly not available in sufficient quantity to meet expected demand. We are beginning to see a number of developers seeking funding, typically a 100-bed home seems to cost around €10m to build, but once up and running, and successfully included within the Fair Deal, capital values rise based on the government agency support for the care an accommodation fees.

From an investor’s perspective, there is the opportunity for an investment that is:

• secured on property,
• with the income supported by a government agency, and
• yields of circa 6.5%.

And, finally, its September next week, and on the 6^th I leave for 2 weeks holiday in Italy; be afraid, be very afraid…………..

* Aragonese Consulting Ltd (‘ACL’) is a specialist capital markets consultancy