Today I bring you a piece from Akhil Patel, editor of Cycles Trends & Forecasts. Akhil thinks we’re in a lull of a colossal bull market that will rip on into the 2020s. Not a very popular view at the moment, but Akhil’s a sharp man, and I value his analysis very much.
The houses built on sand
Akhil Patel, 7 September
Therefore whosoever heareth these sayings of mine, and doeth them, I will liken him unto a wise man, which built his house upon a rock:
And the rain descended, and the floods came, and the winds blew, and beat upon that house; and it fell not: for it was founded upon a rock.
And every one that heareth these sayings of mine, and doeth them not, shall be likened unto a foolish man, which built his house upon the sand:
And the rain descended, and the floods came, and the winds blew, and beat upon that house; and it fell: and great was the fall of it.
St Matthew 7, vv. 24-27 (King James Version)
You would have thought that owning a €35 million, four-bedroom house with sea views would prevent you from having to endure a common problem: having your splendid view of the Mediterranean spoiled by a construction site.
But this is exactly what the vocal residents of the (reputedly) world’s priciest street, Avenue Princesse Grace in Monaco, are complaining about. The principality is undergoing a housing boom because, in the words of a local newspaper editor,
The property that exists is not suitable for young Monegasques. They can’t afford to rent and they certainly can’t afford to buy.
That is quite a delicious understatement for a city where average sale prices per square metre work out at nearly three times that of New York.
The housing project that is causing the anger of the minted residents of Avenue Princesse Grace is a €2.1 billion housing initiative. What makes it stand out – and it has this in common with many projects worldwide – is that it part of a land reclamation project. Fifteen acres of land will be “reclaimed” from the Mediterranean and built out. While the cost of reclaiming the land will be sky-high, the developers will net more than €3.5 billion.
(Since the scheme will create only 1,000 units, I will leave it to you to decide if the housing that they sell will be genuinely affordable.)
The scheme is also due to complete in 2025. There is that date again.
Land reclamation projects around the world
Such projects have been going on in coastal areas for centuries. There is a natural process whereby sand, dirt and other material fill up areas next to the coast: land reclamation speeds this up by pumping out water and dumping a lot of sand on to the seabed to extend the land that can be built on.
This is an enormously expensive process and very harmful to local ecosystems and wildlife. In addition, such land is at risk of subsidence and the cost of maintaining it is also very high.
But once this process is complete, it can then be built on. Small coastal countries and cities have increased their developable area significantly using this process. The Netherlands, Singapore and Hong Kong are probably the most famous examples.
In some cases, this is a response to the need to accommodate a growing population in a small area. But there is another driver to explain why we are seeing so many projects now: high land prices. Most of the world’s most important cities are located by the coast or on lakeshores or river banks. Such places are precisely where land prices are highest, and available sites most scarce. The value of completed housing and commercial space is high enough to justify the cost of “creating” the land in the first place. I will come back to this point shortly.
An opportunity to build a city from scratch
The largest such projects are in Asia where there is a confluence of several major trends: rapid urbanisation, large and growing populations, increasing affluence and high-density living. Building a city out to sea bypasses the problem of having to issue compulsory purchase orders on (often poorer) households that live in districts adjoining the highest priced ones.
But they also give urban planners scope to plan cities from scratch, a luxury not afforded existing city centres. For example, in the Philippines, New Manila Bay will be a 407 hectare city with artificial intelligence integrated into a smart electricity grid and a driverless elevated railway to whisk passengers around town. Anyone who has been stuck in rush-hour Manila traffic will be able to appreciate how much of a step change the latter would be. A project in Malaysia will put the entire road network underground and be a city of skyscrapers, vertical gardens, duty-free shopping districts and waterfront villas for its expected 700,000 residents.
But not all schemes are planned. Because they are so profitable they can be developer-led speculative ventures. In China, which has led the way, the authorities had to halt several schemes because they were sprouting up everywhere in a haphazard way.
So Chinese companies have taken their expertise abroad and this is contributing to a boom in such projects. But this has had an interesting consequence.
The global sand crisis and the sand mafia
Construction in general and land reclamation projects use up an enormous amount of sand. While it may be true that the supply of sand in the world is almost infinite, the supply of the right kind of sand – coarse coastal sand – is not. That is why developers in Dubai, which sits on the edge of a desert, have to go as far away as Australia to get their raw materials.
The demand for such sand is so high that there is talk of a looming global sand crisis. This may sound a little silly, but in fact by weight more sand is extracted from the earth than fossil fuels. Supply for sand used to be a relatively local affair not least because the material is so heavy and 60% of its supply cost is in transportation.
However, such is the demand for sand that it has become a global commodity. It has caused such problems in some countries (for example, changing the course of rivers, increasing the risk of flooding as coastal buffers are depleted) that they have banned exports.
This in turn has led to a “sand mafia” that effectively steals sand and trades it in a black market.
Operating in the legal part of the market, there are a small number of listed stocks of companies that are involved in extracting and selling sand, such as US Silica Holdings (NYSE: SLCA), Fairmount Santrol Holdings (NYSE: FMSA), Hi-Crush Partners (NYSE: HCLP) and Emerge Energy Services LP (NYSE: EMES).
However, none of the charts of these companies are in a strong position at the moment. There was a boom in such stocks into 2014 and now they are trending sideways at lows. Part of this was because investors got excited by the idea of sand scarcity and piled into these stocks and drove them to speculative highs. The other factor was the boom in shale oil which uses a lot of coarse sand.
However, it will be interesting to see if they break out during the second half of the cycle. I mention these stocks now because theoretically such stocks are in a unique position to benefit from both the land boom and the commodities boom of the 2020s.
A new indicator of the peak?
Each iteration of the economic cycle brings new events that play out the logic of the law of economic rent in different ways. The underlying driver is always the same: speculation in rising land prices on increasingly marginal sites. Marginal sites involve land at the edges of the best locations. Land prices in such locations are highly volatile – both up and down.
It does not take a lot of speculation on marginal land to trigger a crisis. At the peak of the cycle, one or two large schemes might fall over and this can cause a collective loss of confidence that results in land prices coming down everywhere, banks withdrawing credit from the economy and a full-blown crisis.t
This is one of the reasons that the very top of the cycle is hard to spot.
But perhaps development projects on reclaimed land will provide a clearer indication of what’s going on, in the same way that the construction of the “world’s tallest building” has proven to be in the previous cycles.
Events in Dubai in 2008 may provide a clue as to how this could unfold. In the 2000s, in light of the buying frenzy for Dubai’s Palm Jumeirah development (which famously included several high-profile English footballers), 300 manmade islands were created off the Dubai coastline. These were intended to be “The World”, with each group of islands designed to reflect a different region around the world, such as Europe with artificially rainy streets.
This was as egregious an example of land speculation as you are ever likely to see.
After the financial crisis in 2008, the scheme collapsed and the islands lay bare. Some of them even started sinking back into the sea. As the economy has recovered, some are now being built on again, a decade on from the crisis.
So, in the years 2024 to 2026, what are the chances that something even more ridiculous is being dreamt up in the boardrooms of large global property developers? We will hear about it because it will be fronted by a global superstar.
When you see that, you’ll know what’s coming next.
Houses built on sand will end up sinking the global economy. And great will be the fall of it…
All the best,
Editor, Capital & Conflict