I developed increasingly close relations with the ugly lately.
After exploring a series of investment opportunities, I came to a realization: That appearances don’t always matter. Hence the “ugly” part of my title.
Although it may not always make sense to compare largely different assets, I believe that comparing various real estate holdings to each other, isn’t completely non-sensical, even if the nature of the assets is somewhat different (e.g. retail, office, etc.)
And so what I noticed after comparing various real estate assets that I had the opportunity to explore, is that not only those which offered the highest returns weren’t always the most appealing, but also that in some cases, even less well-maintained assets (yes, you guessed it, the ugly ones!) were more desirable than “flashier” properties.
Let’s juxtapose a couple of very characteristic examples:
One of the most advertised properties that I visited and explored, was an office complex, with a small retail part. The building was relatively new and in pristine condition. However, it was extremely reliant on one major tenant, to the extent that (upon meeting the tenant representatives) they genuinely believed that they owned the place. Judging from the concessions that I later found out that they had received to sign, I couldn’t blame them for acting the way they did.
On the other hand, I also had the opportunity to assess a widely different asset to the above. In fact, the only common attribute between the two, was the location. Other than that, the second asset had a much greater tenant diversity, was much older, worse maintained and consisted primarily of warehousing units.
Yet the difference in the requested yield between the two assets was only about 1% (in favor of the former). Other than that, the latter asset’s COC was higher, risk was lower (in my view) due to diversification, and (again in my view) potential was greater, as we have yet to see the peak of online retail and this cannot effectively be reached without a network of warehouse hubs at key locations. As if this wasn’t enough, the pandemic has forced so many people to work from home, that there is a genuine discussion as to whether office spaces could be reduced and part of the savings be redistributed among remote employees. (Although I am personally against a remote working future, for many reasons, that cannot be analyzed here.)
I always tell clients that I want to visit (or interact with, as the case may be) the assets that I am working on, because I believe that the numbers don’t always tell the truth. On the other hand however, one should be very careful so as to not let pure appearances drive their numbers. Balance is key. And only comes with experience, that none of us can ever get enough of.