If the “Sage of Omaha” applied his investing philosophy to Australian commercial property, what might he buy?
Warren Buffett’s extraordinary success as a share investor has spawned an entire industry of books and seminars explaining how to apply the Sage of Omaha’s investment strategy to equities.
But what if Buffett turned his attention to Australian commercial property instead of shares – how would his advice apply then?
Buffett’s investment strategy has remained relatively consistent over the decades, centred around the principle of value investing, which involves finding undervalued companies with strong potential for growth and investing in them for the long term.
He looks for companies with a durable competitive advantage, such as a strong brand or a high barrier to entry and invests in them at a price that provides a margin of safety.
If Buffett caught a plane to Australia to have a look around, what sort of property might catch his eye?
Like many visitors to Australia, he’d probably journey to the outback. But while other tourists would seek out kangaroos and koalas, he would probably make note of the farms and see growth potential in agriculture.
The megatrends of a switch to more healthy eating and less processed food, as well as the ongoing rise in wealth in Asia driving demand for animal protein, provide long-term growth potential for Australian agriculture.
Along with direct purchase of agricultural land, there’s the option of buying shares in agricultural businesses.
Beef cattle
The Australian Agricultural Company might be of interest. For one thing, it’s listed on the ASX, which would allow Buffett to remain in his comfort zone.
AACo owns and operates stations, feedlots and farms spanning approximately 6.5 million hectares of land across Queensland and the Northern Territory. It operates along the beef supply chain from breeding to marketing and is in the process of transforming from a commodity producer to a high-end beef grower.
As the second-largest landholder in Australia, its position is hard to replicate. And importantly for Buffett, its shares are trading at a considerable discount to net tangible assets.
While agriculture is a notoriously cyclical business, as a long-term investor this probably wouldn’t worry Buffett. However, AACo is majority-owned by British billionaire Joe Lewis and this might prompt Buffett to look elsewhere in the sector.
Back in the city, when the billionaire investor steps out to buy some essentials, the retail sector might catch his eye.
Shopping centres
The rise of online retail has been nowhere near as bad for shopping centres as first thought, with many successfully maintaining their status as preferred destinations for consumers by offering experiences such as movies, dining or children’s parties.
Scentre looks like it might fit the Buffett investment mould. In Westfield it has a very strong brand and some of its assets are in locations that just can’t be matched, such as Bondi Junction in Sydney or Doncaster and Southland in Melbourne, that allow each centre to dominate its catchment areas. It looks well-positioned to benefit from any long-term growth in retail sales growth. The locations also offer Scentre the opportunity to redevelop and value-add to further drive growth.
Vicinity Centres is relatively well-placed too, with properties such as the Queen Victoria Building in Sydney and Chadstone in Melbourne. With strong brands and locations that can’t be replicated, it looks like these two companies would fit Buffett’s investment thesis.
These two property plays are also sharemarket-listed, and while they are arguably not undervalued, Buffett could use any share price weakness to build up a long-term holding.
Office property might tempt
And what would Buffett make of the basket case of Australian commercial property – office buildings?
The big question is whether he’d be tempted by the heavy discounts these properties are still selling at. As he carries out his research into the sector, he would notice that the Sydney and Melbourne markets are becoming sharply divided, as corporate tenants seek premium office space in each city’s CBD, while properties on the cities’ commercial fringes such as North Sydney and St Kilda Road struggle to find tenants.
So he’d steer clear of B-grade office properties in the cities and on the city fringes. There are so many of these office properties around that they don’t have any sort of competitive advantage.
A-grade CBD offices are a different story, as demand is strong and supply is constrained. Additionally, it looks as if the work-from-home trend has peaked, with more companies demanding employees spend more time at work, which will underpin long-term growth for the sector.
Buffett might take advantage of the negative investor sentiment that is dragging office prices lower to buy these properties as a discount. As a long-term investor, he would be happy to hold on until the market turned.
Source from: Australian Financial Review
