Today I’m sharing an article written by my friend, Peter Churchouse, who with his son Tama runs Churchouse Publishing in Hong Kong. Peter spent decades as the Head of Asia Research and Regional Strategist at Morgan Stanley in Hong Kong, and is a fantastic source of stories and insight on investing in Asia. Peter specialises in real estate. He ran the real estate equity research team at Morgan Stanley, ran an hedge fund specialising in Asian real estate, sits on the boards of major listed Hong Kong and mainland China property companies, and has put together an incredible track record of global real estate transactions over the past four decades.
Peter and Tama write The Churchouse Letter, a monthly publication about investing in Asia, along with a free email called Peter’s Perspective, which you can sign up for here.
Below, Peter recaps a famous deal that changed the course of history – and highlights timeless lessons for investing in real estate.
Lessons from the greatest real estate deal of all time
By Peter Churchouse
The “mighty” Mississippi River is born a mere trickle in Lake Itasca, some 1,500 feet above sea level in the northern U.S. state of Minnesota.
From there it meanders its way south, gathering volume as the increasing flow from tributaries swell it into the fifteenth largest river in the world (and fourth-longest, at 2,320 miles, or 3,733 kilometers).
The river creates some of the most fertile agricultural terrain in America, along with navigable rivers, forests, prairies, and mineral riches.
These bounties led France throughout the 17th century to explore the Mississippi River valley creating settlements across the region.
By the middle of the 18th century, the French held sway a length of terrain from New Orleans in the south, to Montana in the north.
This “Louisiana Territory” was enormous, covering some 828,000 square miles (over 2 million square kilometers).
That’s nearly three and a half times the size of France today – or the size of Cambodia, Vietnam, Myanmar, Laos, and Thailand combined.
The territory becomes a bargaining chip
The territory came to be, as historian George Herring puts it, a “pawn on the chessboard of European politics”.
France ceded control to the Spanish at the culmination of the Seven Years’ War in 1762 under the Treaty of Paris. But Napoleon Bonaparte regained ownership from Spain in 1800 under the secret “Third Treaty of San Ildefonso” between the French and Spanish.
Around the same time, U.S. President Thomas Jefferson demonstrated foresight and smart thinking by agreeing to increase American presence in what was a politically unstable area of North America.
However, he was concerned that political instability in the area could undermine efforts to occupy these lands and lead to further conflict with the American state.
Word filtered that France had entered into a secret agreement with the Spanish to take back control of the Louisiana Territory.
Soon thereafter, Napoleon’s France was facing revolutions across its colonies, most notably Haiti and Hispaniola, where French forces suffered thousands of casualties from war and yellow fever.
Napoleon’s visions for the French colonies in the western Atlantic were in tatters.
His plans to use the Mississippi basin as a base for food production and trading activities to support French colonies in the region now made little sense.
The colonies were breaking, and French forces would be inadequate to protect the Louisiana Territory.
Moreover, plans were afoot for conquests closer to home in Europe. But he needed money to fund those military adventures.
America’s big deal
Jefferson offered to purchase some of the territory from Napoleon. Specifically, the Americans said they were prepared to pay up to US$9.375 million for New Orleans its surroundings.
Napoleon countered, offering Jefferson a deal of incalculable value…
He proposed the sale of the vast Louisiana territory for US$15 million. That’s equivalent to roughly US$250 million today.
The Americans couldn’t believe their luck. The offer was completely unexpected. They were stunned.
In a single stroke, the newly emerging America could almost double its total land area, at a cost of less than 3 cents per acre.
Signed in Paris on April 30, 1803, and aptly announced to the American public on July 4, this deal became known as the Louisiana Purchase.
America went on to become the most powerful and wealthy nation on earth.
Four lessons in deal making from the Louisiana Purchase
In my decades in finance and real estate, one thing I’ve learned is this: the core underlying principals of investing rarely change.
You see, the fundamentals aren’t new. Technology, computing, speed of information dissemination and transparency – sure, these have all helped change the game.
But throughout the span of recorded human history, the same lessons are there in plain sight, again and again. They’re timeless.
The Louisiana Purchase was more a political deal than an outright real estate one.
But there are some major lessons that still ring true today.
Firstly, motivated sellers offer value.
If you’re a buyer, the best sellers of real estate are ones who need to get out, and fast.
Distress equals opportunity
There are hundreds of reasons why an individual might need to sell: Maybe they need cash to bail out their business, maybe they’re leaving the country, it could be a divorce, it could be a case of over-leverage… who knows?
Regardless, a motivated seller usually gives you (as the buyer) negotiating power – in other words, the opportunity for a lower price.
And hopefully, you can pounce, which brings me on to the next lesson: The ability to act quickly can be critical.
Take the Louisiana Purchase. The deal was completed on the April 30. Napoleon’s offer of the entire territory was only made NINETEEN days prior to that!
Had the Americans not acted so quickly, who knows what could have happened.
We do know that Napoleon’s two brothers were trying to talk him out of the sale.
Some of the best real estate buys I’ve made have been done quickly – sometimes on the spot.
Combining a speedy transaction with a motivated seller will give you a better price. Period.
But critically, you have to know your market inside out.
A seller looking to offload quickly often wants to sell you more than just his property. He wants to dump you with the problems that come with it.
Maybe there are structural issues, a leaky roof, asbestos, or a new sewage plant to be installed close by. You get the picture…
The final lesson from the Louisiana Purchase is this: Don’t sell real core assets to fund spending.
It’s one thing to sell assets and reinvest, it’s quite another to do what Napoleon did.
He frittered the entire proceeds on senseless wars and military incursions, squandering one of France’s greatest financial and economic assets.
Some time later Napoleon was reported to have said, “America is a fortunate country. She grows rich by the follies of our European nations.”
I couldn’t agree more!