Real Estate can still be a Hedge
Published by MartinVarsavsky.net in Investments with No Comments
During my business career I have founded 7 companies. The first, and least known, is Urban Capital Corporation, a company that develops and manages real estate in Tribeca, NYC. I started that company while I was at Columbia University together with my partner Len Kahn. We developed over half a million square feet of loft buildings. We currently own 32 Varick St or 11 Beach Street, a 120,000 sq ft building that is made of office lofts and is a favorite with high tech and media businesses.
My other companies are high tech companies. 3 got to be worth over half a billion dollars, one did ok, in one I lost 45 million dollars and while the jury is still out on Fon, I believe it could be my fourth company worth over half a billion.
During my business career in High Tech however, I have alternated between investing in my own start ups, occasionally backing other start ups (the most successful being Eolia started out of my office by my dear friend Miguel Salis, ex CFO of Jazztel and now worth over a billion) and investing in real estate both in Europe and in the USA. Investing in unleveraged real estate has proven to be pretty counter cyclical to high tech. For example when everything went to hell in tech between ’01 and ’04, real estate did very well. And while my timing for real estate has been occasionally wrong (I lost money in 2 hotels in USA in the ’90s) it has been mostly very good. I buy real estate with little or no debt and simply hold on to it. I have rarely sold any.
As an example, 2 weeks ago I bought an apartment at the Continuum in Miami. I bought it at a historically low price. And currently I have my eyes on a San Francisco apartment. Also in a prime building. Why am I adding to my US portfolio of properties? Because real estate is a long term play and I see US real estate at a historical low now both in terms of a low dollar and low values in key markets. So after staying on the sidelines for a decade I am now buying for the following reasons:
My brief view of the contemporary financial world is that George W. Bush and his team did horrendous damage to the US economy, but fortunately neither he nor his mismanagement style are coming back. During his tenure, I avoided the US dollar and anything US related. When we raised US dollars at Fon for example, we immediately, and smartly changed them into euros. But for the next decade I have a different view. I see a Europe unable to make the changes it needs to adapt to a globalized economy and I see America avoiding the mistakes of the past and adapting well. I see Bush as a one of a kind idiot. The fact that Americans chose Obama shows that there is hope in a more educated generation of American voters coming up more focused on substance than myth. That even if Republicans win again during the next 11 years, they will win with somebody more like Bush senior than Bush junior. I think that future US leaders will have common sense and will not dilapidate the country´s economy by fighting useless wars and probably at least partly address the other two huge “leaks” of the American economy: the cost of health care and the costs of administering “justice”. Concretely, and in favor of buying real estate, I think that Obama´s team will reactivate the US economy but will be left with some inflation that will likely do two things: help real estate, and help the US dollar as interest rates rise to stop it. Both are pluses for US real estate.
Bottom line of all this is that I am now converting euros into dollars to buy more US real estate for the first time in close to a decade. I also was lucky enough to change euros into pounds at 1.05 at the beginning of ’09 in anticipation of buying a home in London as well. London is and will be the global financial capital of the world, and right now, with the pound depressed and the markets down, it is a good time to buy there as well. So far I put in bids for different homes in London but they sold for more to others. Will keep trying.
I end with an anecdote. An hour ago this auction ended in Hawaii. I participated in it and I was surprised to see that the home sold for over $5 million. Especially considering how high the real estate taxes, maintenance and membership fees are in Hualalai. A person who buys a home in Hualalai has to spend around $250K in the membership, and an extra $150K per year in taxes and various fees. Plus of course getting to Hawaii. I confess that I was not prepared to pay more than half of what the home sold for. Now you could say, why would people pay so much for real estate that if lucky they will use for a month a year? The answer is that there is something to real estate prices that is akin to brand value. Real estate, surprisingly enough, elicits feelings. And the property I own is in those places, places that turn people on for some reason. Places that other than serving as useful homes make people feel better, like brands, for better or worse, do.
So while I will continue focusing on building companies around my ideas in Tech, I will also continue looking for the new or rising real estate brands. Currently I see them in South Beach, downtown San Francisco, the West End of London and Tokyo.
Follow Martin Varsavsky on Twitter: twitter.com/martinvars
Colu on August 11, 2009 ·
Thanks for sharing with us your opinions and decisions with your portfolio. It´s a good way to understand and see how an entrepreneur works.
A few questions:
– What do you do with the properties you buy? You rent them?
– Why don´t you sell your European properties considering, as you said, that they have achieved the top of its value?
Thanks again for your blogs!
dario mirski on August 11, 2009 ·
Why to buy directly real estate when you can buy REITs or high end Real Estate companies directly through the stock market?
Less hassle, they paid dividends…
Just a thought
Wilson on August 12, 2009 ·
Hola Martin,you should come and check Real Estate in Mozambique,there are good opportunities over there for the next years to come,defintely after the 2010 Fifa World Cup- South Africa .
Anthony on August 12, 2009 ·
You say you currently own building at 32 Varick St and 11 Beach Street… but don’t they look exactly the same! Is it the same project? Just some thoughts.
Raul Moreno on August 12, 2009 ·
Excelentes ideas! Como “value-investor” aprecio mucho este feedback. Parece logico pero es dificil convenser a la gente que en hay que comprar en crisis a buen precio…..pero bueno…. gracias a tu articulo me han escuchado mis padres. Mejor invertir en Southbeach-Miami vs Brickell-Miami, o el mercado es muy similar y da lo mismo? Muchas gracias por tus comentarios.
Julian Martinez on August 12, 2009 ·
I’m interested in learning how do you manage your property around the world. Do you pay a local estate agent to take care of the property while you are gone? How do you pay utility bills, open a local bank account? or pay with a credit card? Do you have a part-time person that takes care of your properties? Do you buy the under your name, or under a holding company?
I currently own a flat in Buenos Aires and I’m thinking of buying one in Miami.
Alex on August 13, 2009 ·
Hola Martin, coincido con vos al respecto de que Es un gran momento para invertir en us real estate. A su vez, desde Leadtorealty tengo el poder de ver cuales mercados suben y cuales bajan ya que capturamos informacion de miles de compradores y vendedores todos Los dias. Hay algo con Lo que creo que difiero con vos. Habiendo vivido en el silicon valley por muchos anios, podria casi asegurar que seguira siendo la gran cuna de las mejores Empresas de Tecnologia del planeta y eso genera ingresos reales y gente con poder adquisitivo en cantidades industriales que se vera reflejado en una sana competencia por subir Los precios de su real estate. Pero la zona de Miami fue victima de millones de inversores que no viven alli y pensaron que comprarian propiedades en pre-construction a precios altos que subirian aun mas. En miami no hay una razon que me haga pensar que el stock de poropiedades se vaya a achicar pronto. No olvides que los bancos miran credit score, income y assets de un borrower para extenderle un mortgage y la gente en Miami ahora tiene problemas con las 3. Espero estar equivocado y que todo se recupere rapido.
Jan on August 13, 2009 ·
didn’t know you were that much involved in real estate.
coming from that site and trying venture business, I find that venture business is really hard to do, i.e. to make REAL money with MANAGEABLE risk. But of course venture is all about entrepreneurship, and that is something that the few big markets like real estate do not really have except for you do development in emerging countries.
There is one thing I would like to add to your ideas: I respect venture entrepreneurs because they create VALUE for society. Real estate, except for development (what does not seem to be your focus), is nothing more than a money game: you have the same building you buy for 10 and sell for 20 and the next guy sells it for 30. No labor, no IP, nada. Just taxes and your capital gain. So in that sense, the tech investments are really very valuable for society.
2 aspects of real estate, which are also very nice : one would be purchasing land – long term investment with no monthly gains. But since you have been doing some real estate, you should be able to have good sources of info and gut feel about land. The second thing is: you have been doing RE only in the western (developed) world. Why not trying out areas where it’s booming? Certainly thrilling, closer to venture business …
rdm on August 14, 2009 ·
You haven’t answered Dario’s question to why not buy REITs instead of physical properties. I would like also to get your thoughts and opinion on the subject.
RE South Beach vs Brickell I think the latest has the greatest upside potential from an investor’s point of view ( and obvious higher risk ). Downtown/ Brickell area is becoming every day a more livable place thanks to the new zoning.
Thank you for your blog.
Bruno on August 14, 2009 ·
What documents are necessary for a foreigner to buy real state in U.S.? Just a passport? A social security number?
Haim Ac. on August 25, 2009 ·
You need many of those green documents with the Benjamin Franklin face in the center :-). The Americans easy their regulations when the money is ready available.
Since you would not apply for loan or a mortgage in the US, you pay for the entire property value and the closing cost (~3%). Real estate agent’s percentages (6%) are usually paid by the sellers.Annual taxes and monthly maintenance/association fees can be costly too, depends where you buy.
You can even get local finance if you pay at least 50% of the property value. A loan company would take the risk of the loan to a non-resident, if they can do a short sale of your home and still make profit, in case of non payment.
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Marc on August 11, 2009 ·
Some really good points here.