Anticipating how a real estate market can shift from one position to another is part of the "secret sauce" of property investing. An entrepreneur and academic examines some real-world examples.

In a change of tack, academic and entrepreneur, Dr Rainer Zitelmann writes about his approach to property investing. He’s written several articles for this publication on matters concerning wealth and psychology, attitudes to wealth and inheritance, and other topics. The editors of this news service are pleased to share these views; to respond, readers should email tom.burroughes@wealthbriefing.com or jackie.bennion@clearviewpublishing.com

Christoph Kahl, founder of the German-American real estate investment and management company Jamestown, is one of Europe’s largest investors in the US real estate market. Across the US, his company maintains more than $10 billion of real estate assets under management. Whereas Kahl’s business model used to focus exclusively on raising funds from German investors, Kahl now solicits capital from investors worldwide. Jamestown has launched a total of 26 closed-end funds which, for example, invested in the Rockefeller Center, General Motors Building and One Times Square in New York between 1984 and 2005. These 26 funds sold all of their real estate assets in the years leading up to 2011, giving investors an average annual return of 19 per cent. A fund for institutional investors was launched in 2011 and has generated returns of 12.9 per cent every year since.

$1 Billion profit
In 2010, Kahl attracted attention with a single transaction, which was crowned as the New York real estate market’s biggest deal of the year. Jamestown and co-owner Taconic sold 111 Eighth Avenue in New York to Google for $1.8 billion. When Jamestown acquired a 70 per cent stake in the property in 2004, it was valued at just under $800 million.

New York: Chelsea Market
Kahl also turned heads with Chelsea Market, an office building in New York. In 2003, he acquired a 75 per cent stake in the building, which was valued at $280 million at the time. This investment demonstrates the factors that determine success in the real estate market. At the time, the Chelsea district was not regarded as being all that attractive and office rents in Manhattan Midtown South were almost 40 per cent lower than in Midtown. However, Kahl expected the gap to close.

Chelsea Market was upgraded and repositioned. By 2011, it was already worth nearly $800 million when it was sold to another fund at the instigation of the 25 per cent co-owner. In 2018, Jamestown sold the property to Google for $2.4 billion.

Much has changed in the decades since Kahl entered the US market. “In the past, timing was everything and the value of real estate was largely driven by interest rate changes,” says Kahl. Today, in contrast, it is important to discover potential in a building - potential that other investors have failed to recognise. “We often buy imperfect assets, the kind that have either not been effectively managed or positioned, but where we see untapped potential. Once the property is perfect, we sell it again,” says Kahl.

Multifamily market
Until recently, Jamestown primarily invested in office assets. But what does Kahl think of the US multifamily apartment market, which has proved profitable for investors in recent years? Kahl believes that the home ownership rate - the proportion of Americans who own their own homes or condominiums - will not return to its pre-financial crisis highs. Young Americans want to stay flexible. And they don’t take the same pride in home ownership as post-war generations did at a time when almost everyone aspired to own their own home and car. As a result of this shift in priorities, the rental housing market is profiting from rising demand.

So what are the biggest mistakes being made by investors? “They are not as aware of risk as they should be. The longer the economy grows, the more careless investors become. Many seem to assume that this phase of growth will never end.” Kahl himself takes a very different view. He sees an asset manager’s core task in structuring a portfolio so that it can generate attractive returns, even in the bad times. Between 1984 and 2011, none of the more than 60,000 private investors who invested in one of Jamestown’s 26 prior mentioned funds lost money.