#00 Mission Statement
Over the past ten years, the world and the way and place we use real estate has changed rapidly and sustainably. This reality must be reflected in real estate investment strategies, and modern research is a fundamental element in being able to classify opportunities and risks. Quantitative approaches and qualitative approaches must be intertwined.
Only this symbiosis can provide a holistic view and outlook on the market. It is the basis and promise of the Lübke Kelber PropBlog - State and Future.
Welcome.
For many decades, real estate market research was conducted almost exclusively at the data and model level, i.e. purely quantitatively. That's why, just a few years ago, I would have placed the emphasis of such a mission statement much more strongly on qualitative, trend-based research. After all, the world is extremely fast-moving and disruptive. This can make models based on historical data obsolete. However, the current environment of geopolitical crises and inflation and interest rate shocks shows that cyclical analysis is at least as valuable in assessing real estate markets.
From an investor's perspective, both approaches must go hand in hand. Factual, data- and experience-value-based quantitative analyses can, above all, map a cyclical course and forecast coming developments. The main objective is to determine the best short- to medium-term risk-adjusted return for real estate investments(1): "When and where is a good market entry point? When do I look for the exit?"
Qualitative approaches, on the other hand, look beyond the cycle, which is enormously relevant for real estate investments that may well be held for ten, fifteen or more years: "Will my investment still be marketable and liquid in fifteen years?"
Qualitative analyses: Quality is the result of hard thinking(2)
Qualitative analysis is primarily about identifying and capturing (mega) trends and thinking them through in scenarios. The guiding question here is, "What does this mean for real estate markets in the long term?"
Two examples where quantitative analysis has failed in the recent past are Berlin, whose performance most models underestimated five to ten years ago, and the underperformance of traditional high street retail. For both, structural and disruptive developments were the responsible drivers.
Research therefore needs to be very broad-based and able to think outside of standard schemas. It must go beyond fundamental supply (inventory, vacancy rates, and investable product) and demand metrics (take-up, net absorption, and market liquidity). Rather, the underlying drivers must be identified, understood, and thought about further to draw conclusions about how sociocultural trends, demographic change, and technological advancements are affecting the parameters.
This includes issues such as:
- The advancing automation of office-based work - are back-office locations "at risk"?
- The contradiction of internationally operating companies, which are the main global growth drivers, and national-protectionist political tendencies. Where does the global mobile workforce stand (and live) in this dichotomy?
- Global demographic trends are multifaceted and in some cases countervailing, but they have a significant impact on residential, long-term care and commercial real estate markets. After all, "demographics explain two-thirds of everything."(3)
To cite just a few examples.
Quantitative analysis - history doesn't repeat itself, but it rhymes
While the above aspects are extremely important, the real art is to put a price tag or risk premium on them to determine a risk-adjusted fair value for individual assets, a portfolio or an entire market. Quantitative aspects are crucial here, as the weight and relevance of various factors change over time and over the course of a cycle.
Therefore, historical cycle trajectories, correlations and causalities are crucial to understand current developments. How does demand for commercial space respond to economic shocks or during periods of high inflation? How during periods of recovery? How does the interest rate environment behave in rising or falling markets? How do supply-demand imbalances affect the future performance and value of a market?
To answer these and other questions, a deep understanding of fundamental economic and real estate data is crucial(4). Sophisticated models and forecasts help identify mispricing in the market and support investment or disinvestment decisions.
At the same time, black swans, such as the COVID-19 pandemic(5) and the invasion of Ukraine, remain events that even the best models cannot predict or map. They remain powerful testimony to the fact that there will continue to be unpredictable events that bring cyclicality. Scenario analyses to assess risk and return are therefore key to assessing future developments. Investors and portfolio holders should maintain a certain degree of flexibility to adjust their strategies. For all of this, quantitative analysis is the backbone.
So, what is this Lübke Kelber PropBlog all about?
In this PropBlog, we will examine both long-term and structural trends as well as cyclical movements and put them into an overall context. Our aim is not only to entertain our readers, but also to support them in their business with analyses and opinions on current topics and complex interrelationships. Always with an eye to the future. Always based on current facts(6).
Lübke Kelber Propblog - State and Future
(1) The results of such analyses depend significantly on the risk profile of the respective investor.
(2) According to John Ruskin
(3) This is the conclusion of the Canadian economist Dr. David Foot.
(4) This requires the highest possible data quality, which - as we all know - is still in need of improvement in the real estate sector. Markets are less transparent than other asset classes and even definitions can be inconsistent, especially across borders. Therefore, experience and local market knowledge are critical.
(5) However, Nassim Taleb, who coined the term "Black Swan," explains that the COVID-19 pandemic is not really one at all. You can read his explanation here: https://www.bloomberg.com/news/videos/2020-03-31/nassim-taleb-says-white-swan-coronavirus-pandemic-was-preventable-video
(6) And like to use maps. We love maps.
