Tag: investing

• An overview of rental housing in France

  Rental housing in France is both heavily regulated and supported through dedicated public funds. Here’s a high-level overview of what that means (via this 2021 Brookings case study by Arthur Acolin):

  • Homeownership rates in France went from 35% in 1954 to 56% in 2001
  • As of 2018, 58% of French households own, 40% rent, and the remaining 2% supposedly get free housing from either their employer or a family member
  • Not surprisingly, younger households are most likely to rent (the figure is > 60% for people aged 18-29)
  • Household size seems to play a major factor in how likely people are to live in public housing

  

  • France has some 4.5 million public housing units and 17% of all households live in them (which represents about 43% of all renter households)
  • Within the unsubsidized rental market, 93.5% of households live in homes owned by individual investors (this is as of 2013) and only about 3.5% live in homes owned by institutional investors
  • This is pretty typical of Europe, where multi-family isn’t an established real estate asset class like it is in North America; so for those of you who like to hate on individual condo investors, check out France
  • In the decade between 2010 and 2020, 28 metro regions in France adopted some form of rent control and, in a few markets, like Paris and Lille, there are also maximum rents that can be charged for specific housing types

  If you’re interested in rental housing, Brookings also has articles covering the US, Germany, Spain, Japan, and the UK. They can be found here.

  2024.01.22

• Rent-controlled apartment

  It is estimated that about 1% of the total housing stock in New York City is rent controlled (2019 figure), which is something different than rent stabilized.

  Generally the way the former works is that you have to have been living continuously in the home since July 1, 1971, and the building itself needs to have been constructed before 1947. If this is the case, then in theory, you should have seen relatively minor rent increases over the years.

  This was the case for the late real estate agent, Alice Mason, who died at the beginning of this year at the age of 100:

  She never left the rent-stabilized [controlled?] apartment where she held her storied dinners, in a century-old building on East 72nd Street. (In Manhattan real estate parlance, it was a classic eight, a gracious prewar layout that included three bedrooms and two maid’s rooms.) In 2011, the developer Harry Macklowe bought the building for a reported $70 million and began to turn the units into condos, buying out the tenants to do so. But Ms. Mason refused to give up her apartment. When she moved there in 1962, the rent was $400 a month. At her death, it was $2,476. The apartment below her, in the same line, was recently on the market for just under $10 million.

  Green, Penelope. “Alice Mason, Real Estate Fixer and Hostess to the Elite, Dies at 100.” The New York Times, 13 Jan. 2024, www.nytimes.com/2024/01/11/style/alice-mason-dead.html.

  For better or for worse, this is an obviously awesome deal, and reason enough to never move and have family members move in with you before you die so that you can try and pass down this asset for generations to come.

  2024.01.14

• Toward positive ZOPAs

  This example, by Matt Levine, is a funny way to understand how many negotiations work:

  In negotiations, it is often helpful to have someone else, some “absent principal,” to blame for your position. You go to a car dealership, the salesperson says “this car costs $25,000,” you say “I want to pay $21,000,” she says “I like you, I want you in this car, but my boss won’t let me go lower than $24,000,” you say “$22,000,” she says “I really want this to work out, let me check with my boss,” she goes into the break room and watches TikToks on her phone for five minutes, she comes back and says “my boss is really mad at me but I talked him down to $23,500.”

  The boss is a crutch, an excuse. The salesperson is adversarial to you — she wants to charge more, you want to pay less — but wants you to feel like she’s on your side, so you trust her and agree to her proposals.

  Now, Matt ultimately goes on to talk about how in some situations, such as in the financial industry, this could be considered criminal behavior. But that’s a more nuanced topic for his column, and not for this blog. Here, we’re just going to use it as a lead-in to say that negotiating is kind of important for real estate.

  In fact, when I was in grad school, my mentors used to always say to me, “everyone should take a negotiating class.” And so I went and did that. It was a lot of fun. I remember us being given “positions”, and then we’d have to go out and see what we could negotiate.

  One particular concept that I often find myself coming back to is something referred to as the “ZOPA.” The Russians in my class were quick to point out that this sounds like the word ass in their language, but in the world of negotiating it stands for “Zone of Possible Agreement.”

  What it describes is whether there’s an overlap between what both parties are willing to accept. For example, if a buyer is willing to pay as much as $100 for a particular piece of real estate, and the seller is willing to go as low as $80, then there is a positive ZOPA of $20.

  This means that a deal should theoretically happen. However, interestingly enough, I discovered in my classroom simulations that negotiations can still arrive at an impasse, even with a positive ZOPA. Some people want to do deals, and some people like to extract everything they can from a negotiation.

  Of course, if you have a negative ZOPA (i.e. no overlap in what the parties are willing to accept), then it’s obviously pretty hard, if not largely impossible, to come to a deal. And since 2022, you could say that the real estate industry has been characterized by a greater number of negative ZOPA scenarios.

  But if my predictions for this year are correct, then 2024 will be the year where we start to see some more positive ones.

  2024.01.09

• More retailers are buying real estate in New York

  Last week we spoke about how many businesses don’t want to own their own real estate, but that some do. We then spoke about Prada’s recent acquisition of 720 and 724 Fifth Avenue for $835 million. However, they’re not the only ones. According to New York’s The Real Deal (thank you John Bell for the article), last year saw the following transactions:

  • Swiss fashion house Akris bought a property from SL Green for $40.6 million
  • Japanese coffee retailer Geshary bought a property on Fifth Avenue from the Riese Organization for $38 million
  • And Dyson bought a building in Soho for $60 million

  Now, some, or a lot of this, is strategic. New York is New York, and global brands need to be there. Another part of this is that there was less competition last year. Fewer real estate companies wanted to buy retail and office buildings, and so end users seem to have stepped in at what they presumably saw as favourable prices.

  But it’s also not totally foreign for retailers to want to own their own real estate. Perhaps the most famous example is McDonald’s, which owns its own real estate and then leases it out to franchisees. Though as I alluded to last week, it’s important to know what business you’re ultimately in. And McDonald’s knows it’s in the real estate business.

  2024.01.07

• Are short-term rentals really a zero-sum game?

  The prevailing view on short-term rentals right now seems to be this:

  

  That is, it’s viewed as a zero-sum game between residents and tourists. There are only so many homes within a city, and so if any of them are to turn into short-term rentals, then it is a direct reduction in the supply of available long-term homes. This can also happen very quickly given the asset-light nature of Airbnb and the fact that these spaces aren’t usually purpose-built.

  It is for this reason that many cities have enacted strict short-term rental laws that basically only allow you to rent out your principal residence when you’re not around or if you happen to have extra space. In the case of New York, you have to be physically present when the dwelling is being rented, and so the use case is exclusively “I have extra space for you.”

  Either way, the basic idea is to stop people from removing homes from the long-term market. I do, however, find it curious that reductions in housing supply seem to be generally viewed as bad, but that increases in housing supply are often met with skepticism. Doesn’t housing supply work in both directions? Why aren’t more people clamouring for new homes to be built?

  Where my head is at on this issue is that I don’t see it as a zero-sum game. I believe that there should be rules and regulations around short-term rentals, but that they shouldn’t stamp out all use cases other than “here’s an air mattress in my living room.” At the same time, I think we should be viewing this as an opportunity. Clearly we need more homes, more hotels, and more short-term rentals.

  It’s only zero-sum if we make it that way.

  2023.12.22

• Cheap and wonderful

  One generally accepted investing adage is that you “make money on the buy”. Meaning, what you pay for an asset will largely determine your fate. Price matters a lot. Some/many would even argue that it’s the single most important thing when it comes to investing.

  Said differently, if you had to choose between paying above market for a high-quality real estate asset or paying below market for a low-quality real estate asset, you would choose the latter, because you have a higher probability of doing well.

  In some ways, I agree with this. If you’re buying an asset below what it’s actually worth, then in theory you could turn around and sell it tomorrow for the market price. So you are quite literally “making money on the buy.”

  On the other hand, if you’ve paid above market for even a high-quality asset, you’ve now just lost money (at least in the immediate term). Because if you also turned around and sold it tomorrow, you’d lose money.

  But is this always the right way to think about investing? One of Warren Buffett’s many famous lines is that he’d rather buy a wonderful company at a fair price, than a fair company at a wonderful price.

  And this would suggest that “cheap” isn’t the only metric to consider. Especially if you think like Buffett does and you want to hold assets forever and benefit from the compound growth that comes along with wonderful assets.

  So as obvious as it may seem, a better way to think about “making money on the buy” might be that you need to consider both price and the quality of the asset. Cheap could be a feature, or it could not be. But cheap and wonderful are generally always a good thing.

  2023.10.11

• A real estate sea change

  Earlier this month, Howard Marks published a memo called “Sea Change“, where he argued, among other things, that it is “nearly impossible to overstate the influence of declining [interest] rates over the last four decades.” In fact, he goes on to say that he would be “surprised if 40 years of declining interest rates didn’t play the greatest role of all” in the success that investors have seen since the 1980s. Of course, the reason the memo is called “Sea Change” is because his overarching point is that this tailwind is now over.

  Let’s consider this in the context of commercial real estate. If you bought a real asset at a 4% cap rate (calculated by dividing net operating income by the price of the asset) and were able to put debt on it at say 3%, you would be receiving positive leverage. Your cost of debt is less than the yield that your asset is generating, and so you are in effect magnifying your returns.

  Now let’s imagine a scenario where interest rates decline even further and somebody could put debt on this same asset at 2%. This is likely to put downward pressure on the cap rate, meaning that somebody might be willing to pay more for the same amount of yield. That is, they’re willing to accept a lower yield. This phenomenon is what Howard is describing in his memo. Declining interest rates tend to create upward pressure on asset values. And in the world of real estate, this is referred to as a compression of cap rates.

  But what happens when things go the other way? Well if you had the same real asset generating a 4% yield, but now the only debt you can find is at 7%, then you are in a scenario where, unless you can afford to pay with all cash, you will be receiving negative leverage. Your cost of debt is greater than the yield that your asset is generating. And that’s the thing about leverage: it cuts both ways. It can magnify your returns, but it will also magnify any losses.

  If the only debt that you can find for your asset is now at 7%, then your 4% cap rate is almost certainly going to need to widen/increase. That is, investors are going to want to pay less for the exact same income stream. This is significantly less fun than cap rate compression, where values just seem to always go up. But, it does also create new opportunities for well-capitalized investors.

  All of this is playing out right now. And it is part of the “sea change” that Howard has called.

  2022.12.28

• Writing into an abyss

  Sometimes I stop and think to myself, “my god, I’ve been writing my daily blog for over 9 years. That’s a huge commitment. Should I stop? Is it really worth it?”

  But of course I do think it is worth it, mostly because I enjoy writing, I enjoy thinking about things, and I enjoy connecting with people through this blog. I don’t want to stop. It’s perhaps also important for me to keep in mind that 9 years maybe isn’t all that long.

  I read this FT article today about investor Howard Marks. Marks is co-founder of Oaktree Capital Management, a person with billions of dollars, and the author of a popular investing memo (200,000+ subscribers) that I generally never miss. And after reading about his backstory, I now feel very much like a blogging baby:

  He began writing the memos in 1990, initially sending them by post to Oaktree’s 50 or so clients. For the first 10 years, “I never had one response,” he says. And then, on January 2 2000, Marks distributed a memo called “bubble.com”, in which he made the “overwhelming” case for “an overheated, speculative market in technology, internet and telecommunications stocks”, similar to past manias such as the 18th-century South Sea Bubble. The memo “had two virtues”, says Marks. “It was right and it was right quickly.” The technology-heavy Nasdaq index slumped four-fifths from peak to trough between March 2000 and October 2002. “After 10 years, I became an overnight success.”

  I have no particular end goal in mind for this blog. I have no need to become an overnight success. My plan is to just continue writing as an adjunct to all of the other things I do. However, I am attracted to the value of discipline, compounding consistency, and long-term thinking.

  It’s not easy doing something for a decade and having nobody respond. At least with this blog, I get the occasional heckler telling me that I’m a greedy developer out to destroy our cities.

  P.S.: If you’re into longish memos about investing, I would encourage you to check out Marks’ latest memo about what really matters. In it, he talks about why short-term events — such as, interest rates might do this — are by far the least important thing to focus on.

  2022.11.25

• State of Crypto

  Everybody wishes that they bought companies like Amazon way back when they first went public, and then held them until today. If you did that, you would of course now be rich. But what would you have had to deal with along the way?

  Well, for one, you would have had to stomach an 80% decline in its share price when the dot-com bubble burst. And so while hindsight is always 20-20, do you really think that, faced with this cliff, you would have held on, not freaked out, and not sold? Yeah, who knows.

  Moving to today and the crypto space, the price of Ether is down 51% over the last 6 months. That’s not quite 80%, but 51% is still a big number, especially if you dumped all of your savings into it and/or borrowed money to do so.

  But does this decline really mean that crypto is rat poison?

  Last year when the market cap of crypto was rising, I believed that crypto had the potential to become the next big thing for the internet. And I still believe that today, which is why I continue to dollar cost average and why I continue to collect NFTs that I like.

  I may be wrong with the conviction I have (and this post will serve as permanent evidence of it), but it’s what I believe. And my conviction doesn’t depend on today’s price. It depends on what I think it could happen with crypto in the next 10 years.

  So with that, here is an interesting “State of Crypto” report that venture firm a16z just published. I think the key message here is that this is a longtime coming. And while it is still early days, momentum continues to grow. But of course, you should decide for yourself what you believe.

  2022.05.17

• Buy and hold

  I know that this is supposed to be a blog about building cities, but it’s also a blog about real estate and I have heard that people sometimes do things like invest in real estate. So here is a terrific memo by Howard Marks (of Oaktree Capital Management) about when to sell assets (and when not to sell assets). His overarching argument is that, most of the time, staying invested is ultimately the most important thing. But that it can be difficult to do.

  Here’s an excerpt:

  When you find an investment with the potential to compound over a long period, one of the hardest things is to be patient and maintain your position as long as doing so is warranted based on the prospective return and risk. Investors can easily be moved to sell by news, emotion, the fact that they’ve made a lot of money to date, or the excitement of a new, seemingly more promising idea.

  Howard is talking about the stock market and his words of advice are particularly important in that context given how easy it is to be a “trader.” I can, so maybe I should. But the same lessons hold true for real estate, even though it is a less liquid asset. A lot of wealth has been generated over the years by those who simply bought well and held for the long term. One good decision and patience can go a long way.

  2022.01.13