Michael Burry, of “Big Short” fame – become famous for correctly predicting the housing market’s collapse in 2008 and making millions hedging against the crash – recently made news for his big bet on a Wall Street crash.
He is so certain of a Wall Street collapse that he has put $1.6B of his fund’s money where his mouth is. This week, his fund, Scion Asset Management, bought $866 million in put options (the right to sell an asset at a particular price) against a fund that tracks the S&P 500 and $739 million in put options against a fund that tracks the Nasdaq 100.
When the market crashes, his fund will exercise the option to sell shares at a high price but be in them at the low crashed prices – making for a handsome profit.
Burry is not the only one sensing danger in the waters. Many ultra-high-net-worth investors (“UHNWIs”) are also liquidating their stocks and allocating more heavily to alternatives like private equity and real estate. Some are even sitting on their cash to wait out the market volatility.
However, one group of smart investors is not content to let their money sit in a bank and let inflation chip away at its value. In addition to inflation, with the rash of recent bank closings, the wealthy are leery of entrusting their cash to a banking industry experiencing upheaval at the moment. These investors are preserving their cash and wealth by banking their money, but not in the traditional sense. They’re land banking instead.
In a sea of uncertainty, smart investors seek the refuge of land. Many are finding shelter in the form of land banking. Leery of traditional banks, the wealthy are turning to a different type of bank – a land bank. Unlike a traditional bank, there’s no risk of a land bank going out of business. Your wealth is locked up in the form of land, and your ownership in that land (whether owned outright or fractionally) can never be lost overnight, like deposits in a failed depository bank.
What exactly is land banking? Land banking is a wealth preservation and investment strategy involving acquiring land, preferably in underdeveloped or developing locations. By acquiring land in a high-growth area, the underlying value of the land can appreciate at a pace equal to or greater than inflation so that you can extract equity at a future exit event.
So why are the wealthy gravitating towards land banking? Because land is buffered from market madness – the type of chaos that investors like Michael Burry are predicting shortly.
Land and real estate, in general, are insulated from broader market volatility because it’s illiquid. So, while inventors liquidate their stocks at a swipe of their phones, investors of tangible assets like land cannot do the same. So, while a run on the stock market can occur instantly, the same does not hold true of real estate – making land a safe investment for preserving value.
Smart investors bank on land because it’s a proven commodity. People will always need it, and new land is not being made. Land has proven over time to be an ideal asset for preserving capital and building wealth through appreciation or development. A land bank is a safer bank, but that pays better returns. Not all investors are keen on the illiquidity of land, but smart investors are willing to leave their money in for a minimum of 3-5 years; they can reap significant rewards while keeping their capital safe.
In a nutshell, these are the benefits of land banking:
Real estate may have short-term dips in the long run but is largely insulated from broader market crashes. It may experience lumps here and there, like in the early days of the Financial Crisis or recently in the early days of COVID, but real estate, like land is resilient and able to rebound from setbacks faster than any other asset class. This is why land is ideal for capital preservation.
Land is a limited resource. Nobody’s making more land. As a result, land naturally appreciates over time. And unlike public equities, where prices fluctuate based on investor sentiment and irrational mentality, land is insulated from the herd. Because of its solid underlying value, its price grows over time, no matter what’s happening in the markets. Holding onto land long-term gives investors the luxury of cashing out or developing the land for a profit when it’s time to exit.
Land is low risk, and because you don’t have to deal with tenant issues, there is little maintenance or headaches involved with land banking.
For your first land banking deal, consider a developing location attracting much attention but where bargains can still be found.
Belize attracts tourists and retirees in droves because of its climate and natural beauty. In addition, with English as the official language and a stable government and economy, investors have the security of knowing their investments are safe.
For shelter from the storm, consider land banking. For a safe, high-growth location for land banking, consider Belize.