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The real-estate market: between feast and famine
Executive Education / 15 April 2020
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Leiter Competence Center Professional & Executive Education
Thomas Kohrs heads the Competence Centre Banking and Investment Advice at Frankfurt School and holds a degree in banking business administration. The focus of his training is on securities and sales. He has more than 15 years of practical training experience as a consultant, trainer and lecturer at the Frankfurt School.

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In recent years, the scenario has become more or less familiar: interest rates stay low while property prices go through the ceiling. In earlier years, it was generally held that ten times annual rent represented a fair purchase price for a property. Now the coronavirus pandemic has made a nonsense of this kind of valuation: Properties in good condition in top locations (such as Munich or Frankfurt) are fetching up to 35 times their annual rent. For investors expecting some kind of ROI, “return” is no longer really the right term to use. How this situation will evolve once the pandemic is over remains open to debate – but investing in real estate will continue to represent an excellent investment decision even if price levels eventually decline from their current peak. In my view, this should correct any distortions and return the real-estate market to a healthier level – although there is no suggestion that investors are worrying about a real-estate bubble just at present.

Market hampered by a bad rep

Investing directly in residential or commercial real estate is not necessarily the right choice for every investor. Instead, investing in what are known as “closed-end funds” is once again becoming more popular. Admittedly, before this the market spent a long time in the doldrums. In the past, the high demand for these products resulted in a spate of offers that ultimately turned out to be shady. Sadly, many would-be investors were burned, and so shunned these investment vehicles for a while. The situation also impacted banks, which initially benefited from the high commissions on real-estate sales – until they found themselves paying out to settle angry buyers’ compensation claims just a little too often.

Rebuilding trust: sound advice plus market shakeout

But this does not do justice to the market as a whole. On the contrary, the extended dry spell in recent years has resulted in something of a market shakeout. Many of the earlier instigators have withdrawn from the market for various reasons – often because sales returns or closing ratios were not high enough. The products on offer have also been cleaned up – or at least, life-assurance and film-fund offers have, thankfully, disappeared from the scene. Instead, the market is rebuilding its substance, to the benefit of both quality and the investment products on offer. It has become clear that the only way to win back lost trust is by providing open, transparent, honest advice. This includes disclosing all relevant terms and conditions to potential investors. For seekers after profitable investments who are prepared to take higher risks and diversify their investment portfolios, alternative investments generally represent an excellent opportunity.

The hallmarks of sound real-estate investment

To be successful in sales, you need good products – starting with your choice of bank. And of course you should never purchase anything on offer sight unseen (or unchecked). The legal structure, market rating, chances of the “closed-end” fund’s success and – as ever – soft costs are key parameters for a successful product.

This presupposes that the initiators, sellers’ banks and advisers are all clear on the following points: What kind of product is being sold? What should all players pay particular attention to? Who is the target market? And finally: Does everybody involved understand the product – and can they explain it to the customer?

Once all these factors have been examined in depth and found to be satisfactory, nothing further stands in the way of a profitable investment and a good, long-term customer relationship.

Ultimately, a good product also depends on the expertise of all parties involved. Certification courses such as our Certified Alternative & Real Estate Investment Advisor or Certified Alternative & Real Estate Investment Manager give you the skills you need to identify market developments, assess their impact on the product at every working level, and present a dependable analysis of the situation.

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