China Shakes Hand With Russia - Buy Industrial REITs
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China Shakes Hand With Russia - Buy Industrial REITs
Chinese dictator Xi recently visited Moscow to meet with Russian dictator Putin.
The whole meeting was highly mediatized because it happened just days after the International Court of Hague issued an arrest warrant for Putin for his many crimes against humanity. If Putin now travels to any of the 120 countries that recognize the court, he will be arrested and likely never be free again.
But China does not recognize the court and besides, Xi doesn't seem to care much about Putin's war crimes.
We got to witness days of meetings between Xi and Putin, shaking hands, talking about how good friends they are, and how they plan to only expand their relations in the future. This is happening right now as most of the free world has put unprecedented sanctions on Russia due to the genocide that it is committing.
China tried to sell this to the world as them trying to negotiate a peace agreement.
But in reality, they are doing the exact opposite.
They gave Putin a huge propaganda victory.
They are also giving him the much-needed financial support for him to continue his war of choice.
And they are also offering to supply the much-needed components that he now cannot easily get from the West anymore.
The proposed peace plan is also completely out of touch. It condemns sanctions against Russia and presents a roadmap for peace that greatly favors Russia over Ukraine. The aggressor, Russia, of course, applauded the plan, which tells you everything that you need to know about it.
Some Chinese diplomats have also suggested that new elections should be organized to see if the occupied territories want to be part of Russia or Ukraine. But... here's a picture of Mariopul - a major city completely razed to the ground with up to 100,000 Ukrainian civilians killed according to some estimates. Should they now vote to join Russia?
Anyway... why am I even bringing this up?
I think that this has major implications for one property sector in particular:
Industrial real estate.
I think that the deepening of tensions between China and the West will only accelerate the trend of onshoring going forward.
With China shaking Russia's hand and threatening to invade Taiwan, I think that many more companies will think twice about being overly exposed to these dictatorships.
Russia's invasion already forced many global companies to leave the country because you simply cannot do business in a country that forces you to draft lists of your employees that could be sent to Ukraine. Staying in Russia would mean financing and supporting this genocide and this is why so many companies like McDonald's have now left, despite having to take major impairments in the process.
Now imagine if China invaded Taiwan someday.
These global companies would face the same issue, but it could be a lot worse since so many of them have large portions of their supply chains in China. This is a major risk that these companies now need to rethink and I believe that it will prompt many of them to bring back portions of their supply chains to the US.
This makes sense anyway because:
Labor cost has risen a lot in China.
Robotics and automation have reduced the cost advantage.
The pandemic taught companies that there are major indirect costs to having your supply chains far away from your end customer.
Being overly exposed to one dictatorship presents major risks in today's uncertain and unpredictable world.
And so bringing back portions of your supply chains to the US (onshoring) makes more sense than ever.
This is a huge tailwind for industrial REITs because it will greatly increase the demand for warehouses, distribution centers, and production facilities.
Where will these companies go?
I think that they will go to the sunbelt markets where they are offered tax incentives, costs are lower, and land is abundant.
On the flip side, coastal markets like California could suffer in the long run if less stuff is shipped from China to the US and more of it is produced, stored, and distributed within the US.
This is one of the reasons why we favor STAG Industrial (STAG) and EastGroup Properties (EGP) for our industrial exposure:
STAG focuses mainly on more affordable Class B properties in secondary markets, many of which are in the sunbelts, and it also owns some production facilities that could become increasingly desirable given what we just explained.
EGP, on the other hand, owns mainly Class A properties in primary markets, mainly in the sunbelts, and most of them are urban warehouses and distribution centers.
Both stand to benefit from the trend of onshoring and we think that they are heavily discounted, offering a path to double-digit total returns, plus some additional upside, in the coming years.
Also, note that I recently met the CFO of STAG Industrial at a conference. You can watch my discussion with him by clicking here.
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Sincerely,
Jussi Askola
Analyst's Disclosure: I/we have a beneficial long position in the shares of all companies held in the CORE PORTFOLIO, RETIREMENT PORTFOLIO, and INTERNATIONAL PORTFOLIO either through stock ownership, options, or other derivatives. High Yield Landlord® ('HYL') is managed by Leonberg Research, a subsidiary of Leonberg Capital. All rights are reserved. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. The newsletter is impersonal and subscribers/readers should not make any investment decision without conducting their own due diligence, and consulting their financial advisor about their specific situation. The information is obtained from sources believed to be reliable, but its accuracy cannot be guaranteed. The opinions expressed are those of the publisher and are subject to change without notice. We are a team of five analysts, each contributing distinct perspectives. Nonetheless, Jussi Askola, the leader of the service, is responsible for making the final investment decisions and overseeing the portfolio. We do not always agree with each other and an investment by Jussi should not be taken as an endorsement by other authors. Past performance is no guarantee of future results. Our portfolio performance data is provided by Interactive Brokers and believed to be accurate but its accuracy has not been audited and cannot be guaranteed. Our portfolio may not be perfectly comparable to the relevant index. It is more concentrated and may at times use margin and/or invest in companies that are not typically included in REIT indexes. Finally, High Yield Landlord is not a licensed securities dealer, broker, US investment adviser, or investment bank. We simply share research on the REIT sector.