AirBNB poses risks and opportunities

We have long known that technology is disruptive. You have to ask however what impact technology will have on our lives looking forward. No where is such consideration more important that in the asset market. The reason why this is the case is because conceptually, the value of assets or wealth is to be measured in terms of 'the net present value of future incomes', or the potential for certain assets to yield those incomes. This is the quantification of value. What happens where there is too much money chasing too few assets, is that there is an economic imbalance, that is resulting in the financial markets trumping the real economy. We have the bidding up of asset prices in most 'aspirational' growth markets, prompting financial relativism. Money is undermining the yields on the assets being bid up. Lower interest rates are part of that, but consider the impact of AirBNB.

AirBNB is having two impacts:
a. It is collapsing yields through competition
b. It is introducing property stock to the market that would not otherwise be there.

Consider the Philippines for instance, or Japan. There are a lot of Filipino expats in the US or Middle East earning money, and the sales-spruiking agents from SM, Robinsons, are targeting the financially naive expats with 'yields' on investment, or property portfolios whilst they are cheap. In Japan, there are a lot of Chinese people buying up investment condos. The 'trade' is not as big as has been 'mooted' in the press, however it is occurring. There is no gross over-supply. In fact, the prospects for AirBNB to add utility and flexibility to property renting is a far bigger phenomenon.
The reality is that, whilst these markets are cheap compared to Western markets, they are in oversupply given the poor utilisation of those assets. The problem is that many of these units bought for personal use, or maybe rental, are going to find their way onto AirBNB, and their competitiveness is going to come under attack from other providers, whose profit motive might be marginal, because they only need to cover costs. Clearly those people holding stock as 'investors' are most vulnerable if they are indebted, and interest rates rise. There is no prospect of that. But is does suggest that the property market is a candle being 'burnt from both ends':
a. The yields on investor property are being undermined by increased stock and the greater ease of 'self-listing' properties through AirBNB.
b. The yields on hotel property portfolios are going to come under attack from AirBNB. Why stay in a hotel when you can stay in a more flexible 'short term' AirBNB accommodation for 7-day stints closer to your preferred location, with less sensitivity to price, and avoid the add-on costs of hotels like telephone, internet, food. This point makes more sense in a place like the Philippines where condos are increasingly integrated with malls.
c. Ultimately commercial properties are destined to come under similar attack as people become more mobile, there is greater use of contractors, and people working from home.

The entire property market is under a revolution and no one is talking about this phenomenon. In fact, governments are seemingly going in the opposite direction of making property even less enticing with higher costs, i.e. They are restricting zoning, driving up prices which raises property rates (taxes), and of course subsidising interest rates.

This is a gigantic crisis. There is no reason to expect imminent crisis. AirBNB will take years to work its way into a serious market phenomenon. Its still new, however the trend is clear. The interesting issue is that AirBNB will just make property prices go 'less high' by driving down yields. It might make one however question the 'validity' of statistics that might use 'traditional' rental prices as a measure of market health (i.e. yields).

It would not be surprising to see governments take the 'perverse' position of blaming AirBNB for the collapse of property in years to come. The reality is that AirBNB is a god-send for better asset utilisation. The problem is ultimately subsidised credit and the 'protracted' low unskilled wages that have become a 'drug' for the global economy. They were caused by the autocratic, statist regimes in 'the third world economies', which today we consider 'the emerging markets'. The problem is that we are going to see people blaming the market for these outcomes, however it was always a 'political crisis' in the making.

Japan yields are actually very reasonable, as as Philippines and Indonesian yields, so we are not singling these markets out as if they were 'overpriced'. They are going to rise in price. The issue is not the 'yields' on these markets, but the warning. There is a crisis in the future, and these markets are opportunities for the next decade. Most Western markets are in fact the 'risk markets'. They are already overpriced. When matters read a head, rental properties are competing with a friend on Facebook with a spare bed. More scary is the fact that AirBNB presents a more flexible scary risk to such property because AirBNB listings are everywhere. They are closer to any particular place you need to be, or want to be.

With so much human capital invested in this market, AirBNB represents a transformational change that will 'upset' property markets, to an extent greater than Facebook and Google Adwords transformed advertising. Why? The value of the underlying assets affected. This does not stop property prices going higher; it means that property prices will inevitably collapse to a lower yield when those lower 'competitive' rents work their way through the market.

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Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

Japan Needs to Restructure its Tax System as the Nation Struggles to Restore Economic Growth

Japan has fallen back into a ‘technical’ recession after recording its 2^nd successive quarter of negative growth. Japanese GDP fell by 0.4% (or an annualised rate of -1.6%) in the 3rd-quarter of 2014. Reuters had forecast economic growth of 0.5% (or annualised growth of 2.1%). Quarterly figures are misleading in the context of the sales tax hike, as it’s probable that people brought forward expenses in the 2^nd quarter (contraction of -1.83%, or annualised rate of 7.3%). Based on statistical evidence, private households are not responding to the stimulus, with private consumption, representing 60% of economic activity, rising just 0.4%.

Equity markets understandably took the contraction badly, with the Nikkei-225 falling 3% (517pts) to 16,973pts in response to the news. This follows a strong recovery in the Japanese market since the BOJ revealed an expanded stimulus program. The Yen was also weaker by 0.85%, falling to 115.58 Yen against the USD, taking the Yen to a 7-year high.

Clearly there was a lack of confidence by Japanese business leaders and consumers in the sustainability of the Japanese recovery. This poor result can be attributed to:

1. A lack of substantive reform
2. The increase in the sales tax rate from 5% to 8% in April 2014.
3. The subdued growth in exports – apart from the one-off ‘yen-depreciation’ gains
4. The interim nature of the data. There is still corporate ‘capital items’ to be reported which will marginally improve the revised numbers, yet the final figure will still look bad.[i]
5. The government’s attempt to “flog a dead horse” by attempting to use stimulus to boost inflation. It is ludicrous because he is not pursuing the right monetary settings to achieve that goal.

The policy is poorly conceived for a number of reasons. The principle objective is to rebalance the public sector budget and to revitalise the economy. If they can revitalise the economy, then this will go a long way towards removing budgetary pressures. The problem is that:

1. Executive Japanese governments are renown for cowardice. They simply don’t have the ‘braze balls’ to pursue policies that will impact the Japanese people.
2. Japan's government simply does not have the courage to cut spending on public works that have sustained a substantial amount of domestic demands, even if it has been hugely inefficient and raised the public debt to ridiculous levels. The good news is that most of this debt is being carried by the Japanese people, so it is easy for the Japanese government to simply raise taxes or inflation to recapitalise the economy.
3. Japanese households are struggling to save given their lack of financial literacy, as well as the poor return on traditional ‘bonds’. The greater folly is that the Japanese government has abused pensioner savings by investing in domestic infrastructure, which has offered investors and the economy a sub-optimal benefit. Few other nations want to invest in government bonds that return a paltry yield of just 0.4%; least of all when the currency is being rapidly debased. The low-medium income Japanese investor is a sucker for it.
4. The Japanese distribution of income is very tight so a great many families are struggling on low incomes. The implication is that a lot of households are vulnerable to a rise in sales taxes. The last rise from 5% to 8% occurred in April 2014, and a further rise to 10% is scheduled for Oct 2015.
5. Given the slack economy, many commentators are expecting the Japanese government to defer the last tax increase until 2017. The problem however is that Abe is attempting to place the burden on the households, and that is just outrageous when you consider the wage restraint imposed upon the economy. The government should be taxing capital, with the ultimately intent to boosting the return on capital, as well as stimulating consumption. That would be particularly sensible strategy given that is where the asset appreciation is. The most sensible way to achieve this might be by ending 'centralised government'. Rather than central governments dispersing funds to prefectural and city governments, it would probably make more sense to bestow a greater responsibility upon local government to carry administrative burdens. 

The rationale for taxing consumers is to stimulate business activity, however this is a ludicrous idea when:

1. External markets are subdued
2. Wage growth is subdued because the reform initiative has been mute

Domestic costs need to fall and the best approach is not to raise consumption taxes, but to reduce the burden on the Japanese people. This can be done by:

1. Boosting immigration, and Abe is certainly looking at that, whilst concurrently scaling up the nationalistic rhetoric.
2. Speeding up the pace of political and industry reform that promise to cut the costs of living and to add dynamism to the economy. We have electricity privatisation in 2015, however more is required.
3. Cutting spending so that the consumer has greater discretion to optimise their own spending. It cannot rely on stronger external trade in the current context.
4. Speeding up privatisation so that capital can be more efficiently employed
5. Tax reform that shifts the burden of the state from the consumer to the holders of capital

The corporate sector, given its exposure to weaker yen were able to contribute in terms of ‘record profits’, however this is not real growth. The problem of course is that Japan cannot look to the external account to boost Japan because of the weak global economy.

There is a propensity for economic commentators to not understand inflation. The Bank of Japan's (BOJ) has a ludicrous goal of 2% inflation. You cannot blow out money supply by a massive 40% and persist in wondering why there is no inflation. They look at inflation as a simple ‘demand phenomenon’, so when they look at inflation and see no inflation, they think ‘the economy needs more pump-priming’. The reality however is that the ‘pump priming’ is boosting asset prices (i.e. asset inflation), not the ‘cost of living’ inflation that affects workers. There is a good reason why this is the case and it is the immense ‘oversupply’ of unskilled labour in the global marketplace, and Japan is no exception. Only among the higher skilled workers is there a rise in incomes.

We clearly see evidence of asset inflation with the Nikkei off its 7.5 year high of 17,500pts. In the case of Japan, the asset inflation is largely confined to the equity market and inner-city property markets, which offer the most tangible exposure to assets in a depopulating market. The property market does however offer substantive opportunity for future gains if there is evidence of economic reforms that auger well for real income growth. In the short term, the property market is destined to be constrained by:

1. Negative growth in real income
2. Slack employment growth
3. Low consumer and business confidence
4. Negative population growth

The only positive aspect is that despite ‘negative’ overall population growth, there is still migration of people to the cities. Rather than people going to the city centres, a great many of these youthful Japanese are turning to the outer areas of Tokyo, which are far cheaper.

The rationale for an election is simply because Abe’s opponents are divided and weak. It would be opportune to call an election whilst that remains the case, but why now? There is no reason why he can’t defer the sales tax, but there is an imperative that he is seen to be carrying through with his reform mandate. There is every possibility that Abe will look to other measures like immigration to boost the economy. Expect the influx of tourists to help placate Japanese fears of increased immigration.

[i] Comment by Yoshito Sakakibara, Executive Director - Investment Research, JP Morgan; “Japan's economy contracts in third quarter” by Li Anne Wong, CNBC.com, website, 17^th Nov 2014.

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Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

Land price rise highlights the reform initiative - but more required

One gets the sense that Abe is causing a lot of angst in Japan. The positive side is that he is appealing to all interests, whether its nationalists, conservatives, and even liberals. He is causing a lot of controversy and derision for his policies as a result; but might in the process he win favour for simply 'doing something' big. Its early days, but Abe is doing a number of important things:
1. Constitutional change - We are hearing 'noises' from liberals (mostly lawyers), but aren't indolent Japanese citizens destined to simply trust him to take them on the right path. We might wonder if the provisions sought are the end of the story, or a precursor for more power. From a collectivist government, that cannot be a good thing, even if the threat posed is not Abe, but a latter leader. But then maybe those constitutional protections were never what we wanted or expected. NZ seeks no less protected than any other nation 'with a constitution'.
2. Tax increases - Not something to celebrate but at least the government is addressing the fiscal imbalance. Does a reform program need more spending or less? I would argue more private spending and less government spending, but that is not going to occur until the private sector sees real progress, so he could be forgiven for spending.
3. Immigration - Recently we have seen the Abe administration open the nation to Asian tourists, as well as the adoption of a new class of visa. i.e. Gaijin ('foreigners') under the proposal, if they have good jobs, stable incomes, needed skills, are destined to be offered permanent residency in Japan. This is surely a measure to improve population demographics. i.e. Aging population, rural depopulation.
4. Child protection - After decades of inaction, there are signs that Japan is finally entering the fold for the protection of children caught up in international marriages.
5. Stimulus - This is perhaps the less impressive move, though it was a brazen some compared to the historic legacy. I would argue that it did not achieve anything, however you could argue that it did boost economic activity in a period of transformation. But its not really happened yet. Perhaps it was only meant to 'encourage people', so the real action would be favourably received.
6. Higher land prices - Land prices had bottomed in 2006, however they have been lacklustre of late, but more recently still, they show signs of improvement. Signs of inflation are not enough though, the government will need to do more to post real wages as well. It has encouraged businesses to do so, but to no avail yet. Consider however some reforms.
7. Trade reform: Japan has been an enthusiastic supporter of tariff reductions. Until recently, it was reluctant to cut tariffs on rice, however concessions have been made, and policies have been adopted to reform agriculture in the nation.

In my book 'Japan Foreclosed Property', I discuss how in the last few hundred years that Japan has been moved by both external and internal events to undergo enormous transformation that raised the nation to prosperity. i.e. After Admiral Perry's entry and during the Meiji Period. The latter are just some of the measures. More important than the 'number', is the nature of them. They are pretty drastic steps for Japan. Westerners benefiting from these reforms, particularly the opportunity to live in Japan, would do well to consider how they might benefit from their 'distinctive cultural differences' in a nation which is pretty homogeneous in its thinking. After all, this is why Abe is trying to break Japan out of its comfort zone. Its happened before, and it seems to be happening again. We have patiently been waiting for it!

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Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

Skilled workers in Japan offered permanent residence

The Japanese government has signalled its intention to relax its visa requirements for well-paid, foreign workers. These “high-quality human resources” (if you still feel human) will be permitted to seek permanent residence for an indefinite period in Japan. Being ‘Japan talk’ one might suspect that ‘indefinite’ is only until they decide otherwise, as you are not a citizen. It remains to be seen however whether those people will be able to secure welfare. i.e. If they lost their job, would they be given access to the welfare system, and for how long? Will they be kicked out? Of course, none of this bothers ‘high calibre’ people with flawless lives. However bureaucrats are plenty flawed, so we might expect them to make mistakes selecting applicants.
The amendment of the Immigration Control Act is targeted at researchers and engineers, who will be appraised on the basis of a points system. Issues to be considered will include factors such as annual income, employment history, and the continuity of the applicants stay in Japan over the perquisite 5 year period. Certain applicants will be given preference, so they will be able to secure “permanent residence” in just two years. The successful applicants will be given the status of "No. 1 Advanced professional” or “No. 2 advanced professional”. The visa will also provide for travel by the applicant’s parents.

One of the most appealing aspects of these provisions will be the prospect of workers in Japan having the flexibility to live there. I would however caution the parents of these applicants to travel around Japan as a tourist before you apply for this visa because you will lose the benefit of being a tourist - namely the Japan Rail Pass. Another appealing aspect for the applicants will be the prospect of their parents being able to freely enter Japan, and even live in Japan. This has great appeal because you can imagine that:
1. Parents can live half year say in their home country like the Philippines, Thailand, China and the United States
2. Children can buy a foreclosed property in the depopulated rural areas of Japan for their parents. These houses can be bought for as little as $10-15,000 when I looked.

Japan is struggling to attract people into its rural areas. Might we expect a revival with liberalisation such as this under consideration. Such provisions are likely to have mixed results. We might expect people to welcome the prospect of money and development that it brings, but they might also experience a shock from the cultural clash, as elderly foreigners in Japan might be expected to bring 'stoic' ways from the old country. In any respect, it will add a dynamic to Japan's rural areas. Of course this type of living is not for everyone. But it will surely appeal to those high income 'high calibre' migrants from the developing world, who will be looking for a better life for their parents, as well as the support that only parents can provide.

One of the fabulous aspects of living in this period is the new options or flexibilities that are made possible as barriers between countries dissolve.

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Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

Strong economic growth in the Philippines

The Philippines has just reported a healthy annualised growth rate of 7.7%, highlighting the enormous appeal of the country as an investment destination. You might be interested in our property report - listed below. There are several appealing facets to the nation:
1. Better economic management
2. Prospect of settling disputes with Muslims in Mindanao
3. Falling interest rates
4. Strong remittances from abroad
5. Strong Business Process Outsourcing
6. Proximity to Asia
7. English speaking, law and customs

The old problems of poor infrastructure are rapidly being curtailed. The low-grade cultural experience as a reuslt of 'enfranchisement' of malls is a problem that should be erased in time as incomes and urbanisation rates rise rapidly.

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Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

Advantages of buying property shift from Japan to Philippines

We have long sung the praises of investing in Japan for a number of reasons:
1. Lifestyle, lifestyle, lifestyle - Japan's conveniences and services make it one of the best places to live.
2. Japanese property outside cities is cheap. If you are not bound by job restrictions, rural areas are surprisingly appealing and not so remote. Foreclosed property gets far cheaper in these areas because there is simply no buyers.
3. Attractive yields of 12% make this an appealing place, though you do need to acknowledge that homes do depreciation, and earthquakes can accentuate depreciation rates. Of course the key is to identify the appealing locations.
4. Regional strategy - There is a tendency to treat Japan as a 'single market' but its really a number of cities surrounded by rural areas that don't really matter to the nation's economy. Basically few people live there and they are 'subsistence based' retirees. They will keep doing that until they die. The point is that these areas are depopulating. The people of Niigata and Aichi, etc are however not moving so much to the city centre of Tokyo and Osaka, but mostly to the 'fringes' of these cities. This is one reason why I bought in Hanno City. In the last 8 years, this town continues to grow in population. There is a new Cainz Home Centre, a new library, a shopping centre under construction. There is a university at Motokaji (nearby), the road up the Naguri River Valley has been upgraded. In other regional centres like Masashi Ranzen, the growth is not as strong because it is 1.5 hours from Tokyo on the Tobu-Tojo Line. Hanno is just 36minutes from Ikebukuro, on Tokyo's Yamanote (green) line, and its recently been linked to the Shibuya through its connection to the Fukutoshin Line, with good connections to Shinjuku and Yokohama.

The important fact is that whilst the population in Japan might be falling, the major cities are actually growing, and the dynamics of rail development is shaping where people migrate to. The implication is - investing in Tokyo and other cities is about realising where train services will be built, and how lifestyle values are shaping those moves.

But this story is not 'good bye' to Japan, but hello to opportunities in the Philippines. Why do you need to live in one place. So many of us have the flexibility to do otherwise, or otherwise to buy investment property.

Asian property markets outperforming Japan Foreclosed Guide Philippines Property Guide
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Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

New working visa provisions for Japan

For Westerners, getting a visa in Japan is a little easier in terms of the conditions of the visa. It is now possible to get a 5-year visa, with an automatic multiple re-entry....well I'm assuming that is only if you have a job, but I'm not sure about that. What I can tell you is before that many people struggled to even get a 3-year visa. I had no problem, but that might be because my first visas to Japan were sponsored by two of the largest corporations in Japan - Sumitomo Group and Mitsubishi Materials. I've spoken to Americans who've said that they were only ever given 1-year visas, and that they had to go to Immigration to update them each year.
The new system will be much appreciated. Read about the revision of policy in this Japan Times article.

I fully recommend taking the opportunity to work in Japan - the most popular areas are English teaching, finance and recruitment. It is relatively hard to get a business visa. You need to set up a business, prepare a business plan, etc. Sounds reasonable, but for some the process will be too onerous.

There are other ways to stay there including study, whether for an MBA or marshall arts (under a cultural visa). Otherwise you can simply stay there visa-free and exit the country every 90 days. Check out the list of countries to see which provisions apply to your country.

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Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com