The legendary short seller has just bet against REITs that own data centers because they are at the mercy of the three tech giants.
Microsoft (MSFT) – Get Microsoft Corporation Report, Alphabet GOOGL, parent company of Google, and Amazon (AMZN) – Get Amazon.com Inc. Report are respectively the 3rd, 4th and 5th most valuable companies in the world.
The three tech giants together have a valuation of nearly $5.6 trillion. They each dominate their respective sectors: software for Microsoft, online search and advertising for Google and e-commerce for Amazon.
They are also venturing into sectors where they aim to play leading roles. This is the case of Microsoft in video games, Amazon in sports and Google in automotive.
Raising Money Against REITs
If they rarely face each other directly, the three titans are rivals. And this rivalry is very intense in the cloud, known for its vast arrays of computers and servers stored in sprawling warehouses. Amazon Web Services (AWS) is the leader, ahead of Microsoft Azure, while Google Cloud completes the podium. This sector, considered to be very lucrative, promises to be the main battleground for the three companies in the coming years, but it could also allow them to seize a new Eldorado.
Indeed, according to the legendary short seller Jim Chanos the three companies will build their own data center infrastructures to no longer depend on third parties unlike today.
The famed hedge-funder has therefore shorted REITs who own data center players, he announced to the Financial Times.
The financier told the newspaper that he is taking large short positions against Real estate investment trusts (REITs), because he believes that cloud providers will take their business. He also said REITs are overvalued and poised for slower revenue and profit growth.
“This is our big short right now,” Chanos told the Financial Times.
He is raising more than $200 million for a fund that will bet against US-listed real estate investment trusts.
Tenants Will Become Owners
Investors short a position by borrowing an asset, such as a share of a stock, a bond, or another security, from their broker, and sell these shares at market price. They then purchase the shares back at a lower price to return to their broker. The amount that the asset has declined in the meantime constitutes their profit.
REITS are listed companies that were created in the 1960s. The objective of a REIT is to build up a real estate portfolio in order to generate rental income and bring out long-term added value. Investors therefore buy shares, and the REIT pays them dividends. Thus, REITS invest mainly in commercial real estate, office buildings, hotels, senior residences but also in residential buildings.
More than 72 million square feet (6.7m sq m) of data center space is owned by publicly-listed data center REITs, according to reports.
“The story is that although the cloud is growing, the cloud is their enemy, not their business,” Chanos told the Financial Times. “Value is accruing to the cloud companies, not the bricks-and-mortar legacy data centers.”
“The real problem for data center REITs is technical obsolescence. Their three biggest customers are becoming their biggest competitors. And when your biggest competitors are three of the most vicious competitors in the world then you have a problem.”
Chanos and his investment company Chanos & Company, formerly known as Kynikos Associates, are known for their successful bets against the broker Enron, the coffee chain Luckin but also the car rental company Hertz.
The financier, however, saw his bet against Tesla and the Chinese real estate market, which he had predicted they will collapse, goes wrong.