175. Mall investment as model of bad investment
July 23, 2009 § Leave a comment
Lets say you have a million, and can borrow 9 million, and build a mall for 10 million in a location where population and spending are increasing. In the first year profit on rent may be 1 million, half of which is payable to the bank as interest. You then have a profit of half a million, or fifty percent of your own money. Pretty good. Two years later, growth in population stops as the community is built out. Rising expectations (projections) on which the mall loan was based are thwarted. Rents decline (especially on stores like home depot that were selling to unfinished homes.). rents are down… if the mall owner has used the now existing building as further collateral for a loand to buld out yet more malls or other investments, so much the worse.
So the typical mall building is speculative and almost certain to get into trouble. This contrast with investment that comes from savings and not from borrowing, which is the old way, amplified by small loans backed by solid security.in this case on the resale value of the mall, not its projected income.
This borrow to invest model is what has gotten us into trouble.