The Investment Case for German Residential Property (Part III)

Thursday, Nov 01 2012 by

Continued from here.

OK, now we’ve looked at German residential property fundamentals. The current supply/demand & home ownership rate, rental yields, safe-haven status, and particularly the low valuations, certainly appear to offer a persuasive investment case. So, how do we exploit it?!

As I’ve said, I’m perplexed by the general investor obsession over direct property investment. What a hassle! And let’s correct a key misconception: People say they prefer direct investment as they can leverage it up – something you can’t, or shouldn’t, do with an equity investment! Yeah, sounds logical…but it’s complete rubbish! That coveted (?!) leverage is already embedded in listed companies (and far more efficiently/cheaply than you could obtain).

Let’s say you’ve a spare 300 K knockin’ around. You could buy a 1 mio property, with the help of a 70% mortgage (and years/decades of property/tenant headaches to come!). Or you could invest in the equity of a listed property company that owns 1 mio of property (with the same 70% leverage). All at the click of a button & an occasional read of their financial reports. What an easy choice… OK, but who knows where the hell the share price might trade?!

Well yes, admittedly Mr. Market is one crazy sonnuva#####…but share prices do return to fair value, in due course. And that’s the beauty of the market – it offers frequent opportunities to buy at a discount, to sell at a premium, or even to do both simultaneously! On occasion, that spare 300 K could easily buy you 400 K of equity & ownership of 1.3 mio of property. Transform the company into a REIT, and soon idiot investors will be falling over themselves to buy you out at a huge premium 

Yes, bargains are pretty much always available in the market. Sometimes an entire sector’s a bargain, or sometimes a sector just has one or two bargains lurking. Such gems might be obvious, or they might be special situations that require a lot more digging. Of course, the opposite’s true too – the market gets caught up in its own euphoria, and then nobody notices market values have far outpaced underlying intrinsic/asset values…

Before drilling down to look at individual companies, it’s only sensible to first evaluate how the entire residential sector stacks up. To do that, note I’m sticking with (for simplicity) a subset of the sector – residential…

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About Wexboy


My personal investing career began with an emerging markets obsession. Investing in individual emerging market stocks was a much taller order then than today, so I gravitated towards investment fund shares and warrants. Little did I know that (despite the volatility involved) this would turn out to be a very fortunate approach – it pretty much saved me from the consequences of poor/misguided stock analysis, chasing stock tips and investing in garbage stocks all the way down to zero.... Only when I learned of value investing did I finally discover a quantitative approach, plus a set of tools, that appealed to me and equipped me better for investing. And I guess it appealed to my mathematical background and perhaps my natural scepticism. It also tempered my lust to dive into investment trends – in fact, I’ve come to realize that any decent secular trend will take many many years to play out and there will be cycles of booms and busts in any related stocks to exploit, so hold your horses, stick to value investing and your chance will come…!  more »

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