Real Estate is Challenging
Pfäffikon SZ, Switzerland – Real estate appeals to a large audience. At first glance, investing in real estate seems to be a straightforward process. One goes to the bank, secures a loan, purchases a house, rents it out and reaps in the profits. In the past, this was in fact the case. In the mean time many real estate tycoons have bitten the dust, consumed by bulging mountains of debt. It was not the crisis that was to blame, rather, the irresponsible investment behavior on part of the property moguls in question. This has saddled the sector with a very real integrity problem.
Trends
Investing in real estate professionally in today’s market is much more demanding. The first problem that comes up is how to deal with interest rates that are poised to rise. Moreover, there are numerous trends that make investing in real estate challenging. Social and sustainability trends come to mind. Today’s tenants demand more than four walls and a roof above their heads. Additionally, big investors are increasingly collaborating at a local scale, in small teams. I am observing this trend in the hedge fund industry as well, but I digress.
Several years ago I did a thorough analysis for a Dutch property investor on investing in data centers. This was an informative experience and gave me insights into the manner in which large real estate investors view such an investment scenario. What mattered to me was that real estate had to add something and must have a unique starting point. We too invest in real estate – be it in a nuanced manner. These properties have a unique function in relation to a strong business model. I love these types of combinations but do not come across them too often.
Critical
As a private home owner one should take a critical look at ones real estate investment. What strikes me is the ease with which home purchases are being made. Fueled, in some cases, by fiscal advisors or eager bankers. I see this pattern not only in The Netherlands but also in Switzerland. The Swiss are taking serious measures to subdue the bubble in their real estate market. The Swiss are naturally conservative and now often try to have gullible foreigners take the hit for a possible correction in the housing market by prematurely selling their real estate. Moreover, Swiss regulators are increasingly tightening the screws for future home owners; a logical and sensible development.
World Champion Debtor
In The Netherlands events are unfolding in a different manner. The Dutch remain the world champion in mortgage debt. Moreover, one in three houses in the The Netherlands is under water. For this reason I endorse the findings of Lucienne van der Geld, director at Netwerk Notarissen. She holds that the extent of trouble the Dutch housing market is in, is not sufficiently acknowledged. The market is kept afloat by savings, deposits, donations, subsidies or additional loans. All of which amount to a very unhealthy basis for a real estate market. Moreover, I have to ascertain that the net wage or the purchasing power of John Doe has been undergoing a downward trend. Owning a house while you rush to collect your food stamps is insanity.
In any case; investing in real estate, both privately as well as for business, requires specific knowledge. The Dutch NVM cheering for the first upswing in the market is a sham. It’s textbook ‘first level thinking’.
It remains for me to wish you a good weekend.
Jan Dwarshuis is a senior asset manager at Thirteen Asset Management AG, where he is responsible for the Thirteen Diversified Fund. Dwarshuis writes his columns in a personal capacity and is not paid for them. Nor is he paying for his columns to be placed. Professionally, he holds positions in major European, American and Russian stock funds. The information in his columns is not intended as professional investment advice or a recommendation to make certain investments. At the time of writing, he has no position in the above shares and has no intention of doing so in the next 72 hours.
