“You get paid in direct proportion to the difficulty of problems you solve.” - Elon Musk
Capital Thinking • Issue #532 • View Online
For the past few years I’ve had a side gig I rarely talk about.
Not because it’s a secret or because I don’t want to talk about it; but because it is, without question, unsexy.
The Sexy Investment Premium: Opportunities in Boring Assets
Sophie Bakalar | The Collaborative Fund Blog:
When time and opportunity allows, I invest in government service buildings, particularly properties leased to the U.S. Postal Service.
Definitely not a subject most people want to chat about at dinner parties.
Post offices are a unique beast in the investment world. Cap rates are often 10-14% (and can be even higher).
That’s on a lease where the tenant is the U.S. government. There’s virtually no risk of default and construction is first-rate since buildings must meet strict specifications.
While this is true, it doesn't mean everyone holds the same opinion of Post Office leases. Check out tomorrow's post for specifics. Sophie is definitely on to something here, but she's nearly 50 years behind me. :-) - Editor
Meanwhile, cap rates in most real estate sectors range from 3-8%, often with substantial risk.
Why does a post office in rural Ohio with effectively government-guaranteed rent have a higher return than an apartment in downtown Manhattan?
Because one is substantially sexier. More investors are focused on newly constructed high-rises with skyline views, because they’re covetable pieces of real estate.
Of course, liquidity premium accounts for a substantial portion of the return differential, but I’d argue that most of the basis is psychological. Assets we want to own and talk about at dinner parties offer weaker risk/return profiles.
We’re paying for hype.
This isn’t just true for real estate.
I’m increasingly interested in unsexy consumer investments: either goods and services in seemingly “boring” categories or more back-end, infrastructure opportunities (e.g., supply chain management and last mile delivery solutions).
In other words, categories with larger pain points and less competition.
*Featured post photo by Elizabeth Kay on Unsplash