Location, location, location?
Within the real estate industry there’s a very well-known saying: “Location, location, location.” But, according to Kahl, what many real estate investors do not understand is that a good location doesn’t have to stay good, the same as a bad one doesn’t have to stay bad. “Many thought Fifth Avenue in New York would always stay a top retail location; they believed their investments were assured and nothing could go wrong. But that turned out to be a mistake, because at some point rents for retail space climbed so high there that very few retailers were willing and able to pay them. Subsequently, rents have fallen sharply, many units are vacant and prices have eroded.”
The examples of Chelsea Market on the one hand and Fifth Avenue on the other prove just how much the location can change - and that canny investors who anticipate the change at an early stage can reap the rewards.
Doing nothing Is sometimes the best strategy
Shortly before the financial crisis, in 2006 and 2007, Kahl sold 75 per cent of his company’s real estate assets. At that time, prices had been driven to dizzying heights and the investment market was almost exclusively dominated by optimists. During the financial crisis, the market collapsed and almost dried up completely. From 2005 to 2011, Kahl bought next to nothing because there were hardly any properties available at reasonable prices. Sometimes doing nothing is the best strategy - and at times like these, it’s certainly better than buying overpriced properties. Only once prices had fallen back by about a third from their peak did Kahl start buying again.
Alignment of Interest
When Kahl advises private and institutional investors, he tells them to make sure that their interests are closely aligned with those of their asset manager. Many asset managers are paid based on the volume of the assets they manage. Therefore, they tend to buy as many real estate assets as possible, even very expensive ones. In 2011, Kahl launched the first open-ended real estate fund in the US that had a performance-based fee model as one of its key components. “The asset manager earns more when the fund delivers particularly good results and less when the fund doesn’t do so well,” explains Kahl. In his eyes, it is essential to have such a congruence of interests. After all, it gives the asset manager the maximum incentive to achieve the most attractive returns possible for investors.
About the Author
Rainer Zitelmann holds doctorates in history and sociology. He is the author of 21 books, the most recent of which is The Wealth Elite.