Focus on the property

Value investors call it “strategic market position” and microeconomics labels it as a monopolistic market position. In the real estate industry, it was originally recognised by Johann Heinrich von Thünen as “locational rent”, and was described in William Alonsos city model as the Central Business District (CBD) in the second half of the 20th century. The limited duplication of locations and the belonging spaces is the requirement for a real value development of real estate in growth processes.

Real estate investors following an investment approach based on the principles of value investing will focus on the property itself and with its regular earning power. Value investors mainly analyse the use of space and not refinancing income from these uses. Normally, people are the users of real estate, and thus, must be the focus of the considerations. Other issues – like tax and financial optimisation issues –are important, but should come second. The more mature and competitive a real estate market is, the more the needs of the user must be in the focus. The goal must be to have the right building with the right service at the right location.Which school-of-thought is the right one: the portfoliobased or the value investing? The answer is surprising: both. If all market participants believe in the efficiency of the market, and behave that way – they require efficiency but do not create it—then the market cannot be efficient. If all market participants act according to value investing principles, then the market would be efficient and value could be created by portfolio management alone.

Perhaps real estate-related aspects will become more the focus of investment decisions. However, that would not mean turning away from the financial perspective. It would merely mean improving the vision of the value investor as a necessary addition to the portfolio-based view.