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The market as a regulator

Corporate finance is not an academic discipline, and there is no single way to apply it in practice. Even among financial analysts, there are differing views, but two main views can be identified. Representatives of one view assume efficient capital markets and thus assume that an achievable price for a property equals its value. Investors who have this view mainly deal with portfolio management for ideal diversification. If there is no difference between value and price, because – this is the basic assumption – the markets are efficient, then an asset position can only be improved by optimally diversifying the portfolio. In other words, they destroy all unsystematic risks in a portfolio. An in-depth analysis of each property is no longer the main concern. Followers of this perspective are regularly transaction-oriented and make up most players in the German real estate market and on Wall Street.

The other view is so-called value investing, which was originally created by Benjamin Graham, and whose most renowned follower is Warren Buffet. Investors from this school of thought assume that value and price of a real estate property (or a company) do not have to be identical. In fact, the value of an asset can be drawn from the cash value of all future payments coming from the asset itself. From this, the possible selling price of the asset at a later disinvestment is consciously taken out of the calculation.

Terminologically, those who take money from their own asset portfolios are considered investors, while an investment where the later (profitable) sale of an asset is included in the calculation is considered speculative.


A second financial perspective prefers so-called value investing. Here, tax and financial optimisation of the investment is not the focus, but rather the investment object itself. It must show “goodwill”. With real estate, this goodwill equals the locational rent.
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Value investors are thus focused on the long term and are not focused on the transaction. No value investor would sell a good property just because the market is currently down or up. Based on this investment philosophy, portfolio considerations do not play a role in purchase decisions and already purchased real estate or companies are kept for the long term. The goal of value investors is to buy “good” real estate or companies, preserve and keep these. A property or company is “good” when it promises high interest of owner’s equity for the long term because of a strategic market position. Warren Buffet himself likes to buy companies that have “goodwill”, where the value (not necessarily the price) is above the book value of the equity.

Referring to real estate, especially good properties are those who have high shares of land value. In other words, those found in first-class locations. Then, the share of economic depreciation of a building to the total investment is the lowest. According to Warren Buffet’s investment calculation, scheduled tax or balance sheet depreciations should not be subtracted from the cash flow of a company, but rather, expenditures are necessary to maintain the capital stock in an economically sustainable way.

The “goodwill” never runs out, as opposed to the physically tied-up capital, similar to the way the building loses economic value, but not the land. Since in the real estate industry, buildings are regularly written off, in terms of their acquisition costs, but not their replacement costs, a relative undervaluing of the property with high land value shares occurs systematically.