Big Opportunities in London Real Estate Coming?
London real estate may be about to become a big buying opportunity.
London real estate is among the most expensive on earth. All sorts of international investors buy real estate as a "safe" off-shore investment to hedge their risk of having their assets expropriated by their home governments. There's nothing new about this, but the degree to which buying has occurred in recent years has pushed London real estate prices through the roof.
So if prices are going through the roof, does that mean London real estate is in a bubble? If you read the typical commentary and analysis, you'll find that most say no, and that prices can go much higher. The logic is that the demand continues and such demand may actually increase. But demand has a funny way of drying up quickly. Just look at what happened with the subprime debt bubble that almost caused the collapse of the world's banking system. One day everyone was buying. Demand was high. The next day everyone ran for the exits.
Am I saying that London real estate is in the same category as the subprime bubble? No. But I am saying that just because demand is strong today doesn't mean it will be strong tomorrow. So what could change current demand for London real estate? To help us understand, here's a simple, maybe even simplistic, guess about how demand can change in a heartbeat.
Let's say that these sophisticated types see the prices rising and decide that there are other safe places to put their money - like in gold, for example. Many already do this, of course. But what I'm suggesting is that the demand might shift more to gold in the future. If demand slackens a bit, prices drop. If prices drop enough, maybe some of the investors that bought near the top get disgusted or even panic and start selling, driving prices down further. That's how things happen.
So how can you tell if that's going to happen? You can't always time this sort of thing. And, in fact, prices have already dropped in the London commercial real estate market, specifically for office space. That leads me to think a further drop may not occur, and therefore there may be no great opportunities to buy London real estate. On the other hand, here's an indicator that might be telling us otherwise.It's got to do with public and national funds in Asia.
You see, these sorts of funds are notorious for making a big move into some asset right before it starts to tank. I think part of the reason is that they are the classic case of people managing "other people's money." I've dealt with one of these funds in the past and got exactly this sense - that while the people in charge certainly wanted to do a good job, they were more focused on keeping their jobs rather than getting good results. And as anyone in the investment management business knows, getting good results isn't the only way you keep your job. As long as your investment "performs" as well or, ideally better than some "benchmark," you probably keep your job. Even if you lose lots of money, as long as you didn't lose more than your benchmark, you're good to go.
I know, sounds crazy, but that's the investment business these days.
So whatever benchmark these guys use, as long as London real estate does OK in that context, they'll keep their jobs - their real goal in life. Remember these folks come from developing nations and these sorts of jobs are real plums, providing good salaries and the opportunity to travel.
(They're not all that different from us Americans, but the thing is, do you want people who think this way managing your money?)
Listen, these people have all sorts of good reasons to invest in London real estate. You can read all of them by clicking HERE. I'm just saying that these national funds don't always make the best choices at the best times when it comes to allocating their money, and this may be one of those times when they're making a good choice, just at the worst time.
So if that's the case, and the market tanks, that will then be the right time to invest in the sort of London real estate that these national funds are investing in today.
London real estate is among the most expensive on earth. All sorts of international investors buy real estate as a "safe" off-shore investment to hedge their risk of having their assets expropriated by their home governments. There's nothing new about this, but the degree to which buying has occurred in recent years has pushed London real estate prices through the roof.
So if prices are going through the roof, does that mean London real estate is in a bubble? If you read the typical commentary and analysis, you'll find that most say no, and that prices can go much higher. The logic is that the demand continues and such demand may actually increase. But demand has a funny way of drying up quickly. Just look at what happened with the subprime debt bubble that almost caused the collapse of the world's banking system. One day everyone was buying. Demand was high. The next day everyone ran for the exits.
Am I saying that London real estate is in the same category as the subprime bubble? No. But I am saying that just because demand is strong today doesn't mean it will be strong tomorrow. So what could change current demand for London real estate? To help us understand, here's a simple, maybe even simplistic, guess about how demand can change in a heartbeat.
Let's say that these sophisticated types see the prices rising and decide that there are other safe places to put their money - like in gold, for example. Many already do this, of course. But what I'm suggesting is that the demand might shift more to gold in the future. If demand slackens a bit, prices drop. If prices drop enough, maybe some of the investors that bought near the top get disgusted or even panic and start selling, driving prices down further. That's how things happen.
So how can you tell if that's going to happen? You can't always time this sort of thing. And, in fact, prices have already dropped in the London commercial real estate market, specifically for office space. That leads me to think a further drop may not occur, and therefore there may be no great opportunities to buy London real estate. On the other hand, here's an indicator that might be telling us otherwise.It's got to do with public and national funds in Asia.
Asian investors are the biggest buyers of office property in the City of London this year, wagering that the financial district’s volatile market has changed since it routed Japanese buyers in the 1990s.
Malaysia’s state pension fund and the Korean Teachers’ Credit Union are among investors from the region that spent about 1.77 billion pounds ($2.8 billion) on income-producing office buildings in the district in 2012, more than a quarter of the total, data compiled by Jones Lang LaSalle Inc. shows.
You see, these sorts of funds are notorious for making a big move into some asset right before it starts to tank. I think part of the reason is that they are the classic case of people managing "other people's money." I've dealt with one of these funds in the past and got exactly this sense - that while the people in charge certainly wanted to do a good job, they were more focused on keeping their jobs rather than getting good results. And as anyone in the investment management business knows, getting good results isn't the only way you keep your job. As long as your investment "performs" as well or, ideally better than some "benchmark," you probably keep your job. Even if you lose lots of money, as long as you didn't lose more than your benchmark, you're good to go.
I know, sounds crazy, but that's the investment business these days.
So whatever benchmark these guys use, as long as London real estate does OK in that context, they'll keep their jobs - their real goal in life. Remember these folks come from developing nations and these sorts of jobs are real plums, providing good salaries and the opportunity to travel.
(They're not all that different from us Americans, but the thing is, do you want people who think this way managing your money?)
Listen, these people have all sorts of good reasons to invest in London real estate. You can read all of them by clicking HERE. I'm just saying that these national funds don't always make the best choices at the best times when it comes to allocating their money, and this may be one of those times when they're making a good choice, just at the worst time.
So if that's the case, and the market tanks, that will then be the right time to invest in the sort of London real estate that these national funds are investing in today.
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