Why is Billionaire Sam Zell bullish on real estate & logistics stocks?

Good businessmen and good business activities depend on the ability to resolve things and India seems to be designed to not resolve things, says the Founder and Chairman of Equity Group Investments.

As a group, you have investments in real estate, hospitality, transportation and infrastructure. What is the sense you are getting when you look at all your businesses? Which are the businesses you think will survive and come out stronger?

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I think parts of real estate are going to perform really well and come out very strongly. I am very positive about the residential side of real estate. I think multifamily manufactured homes are all places where there is significant ingrowing demand and they will perform very well going forward. At the same time, retail looks more like a falling knife and we are all seeing how far down it is going to go. Certainly the experience of being sheltered in place for two and a half months and thereby being forced to shop and do banking online is going to accelerate that would otherwise be slowly moving online.

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For example, in the United States, about 13% of our retail sales as of January 1 were online and there was some expectation that over the next six to seven years, it will move from 13% to 30%. Now it is very likely that we will reach 30% much quickly. A lot of people who would do online shopping or online banking have been forced to act accordingly. As far as office space is concerned, there is a lot of speculation that sheltering will kind of change; I am relatively sceptical of that. I think we have done pretty well acting remotely but working remotely with a group of people you know for two or three months is way different from attempting to operate remotely in the future.

We are social beings and we want to interact together. So I think that all of this discussion about spaces disappearing is very unlikely. Is it likely that people will operate remotely? Maybe one day a week possibly. Will that change the demand for office space? Not significantly. They say people are going to want to move out of the city. Well that sounds good but it is not very practical. After we get through pontificating about that which is not realistic, we are going to go back to realising that there are benefits of scale and benefits of people working together. There are benefits of businesses that can communicate within their own offices. I think we will see a lesser impact going forward and certainly less than the ones currently being projected.

In some other areas like cell towers, warehousing, I see demand increasing for them. Real estate is likely to basically be relatively benign in this upcoming environment. As far as other areas are concerned, there are obviously going to be changes. I do not think we know what they are. The whole movement towards solar power and wind power and reduction in processed fuels is something we cannot lose sight of. But we also cannot make assumptions that this is going to happen overnight. It is going to happen over three or four years and that means there are going to be a lot of opportunities in between.

Of the areas that interest me most is logistics. I think the ability to move things and the ability to interface within communities is going to be different than it was before and that is going to be a greater opportunity. I also think there is going to be a lessening focus on globalisation. We have all learnt some pretty painful lessons that extended supply chains create significantly greater risks than we were ever willing to focus on. In the same manner, we have been operating for the last 10 or 15 years on the theory that the only thing which is important is to make it cheaper. I do not think that is going to continue forward. I think we are going to see more local production and they are going to see more stuff brought back to the United States. Some of the remote stuff that India has been particularly affected at doing, the demand for that is likely to decrease as we reorient the way the world is working.

Has India ever occurred to you as a land of opportunity where you want to invest directly or indirectly?
We have invested in India. I would not call it a terrific experience. The legal system in India leaves a lot to be desired for. I tell people that we invest in the emerging markets where we trade growth for the rule of law and somehow India takes that one step further in the rule of law becomes further and further away in time frame, it becomes more and more difficult. Good businessmen and good business activities depend on the ability to resolve things and India seems to be designed to not resolve things. Therefore, it makes it a less attractive environment when there is no way to accelerate or predict a time frame for resolution of difficulties.

What will it take to convince you and your firm personally to come back to India and start investing again?
We are always attracted to countries and areas where things are predictable; where I can predict how long it will take to get something done and where I can predict if we have to go to court, what is a reasonable time. I do not think India can provide those answers today and certainly it has not done so historically. It is certainty that attracts capital and it is uncertainty that makes you look at other places.

Investing is like allocating capital or positioning your capital to benefit from future trends. The future is uncertain and risk is back on the table. How does one go about investing right now?
Allocation is the critical element and more than anything else, my job is the allocation of capital. Going forward, we have to look at a whole bunch of criteria that affect your thinking. Obviously, as we just mentioned, rule of law is very important. Equally important is demographics and certainly demographics is an area where India has a benefit against the rest of the world. Demographics translate into demand and ultimately as an investor, more than anything else, they are looking for demand and the ability to use capital to provide answers to that demand. That is the way we have to look at investments. They also look for an environment where there are some existing entrepreneurial class for whom we can provide capital. I do not think that going into a place like India or other emerging markets because the expression makes a lot of sense. So to a large extent, it is important to be able to tap into a local entrepreneurial class that is both competent and has their own capital and is welcoming to third parties.