Jan 16, 2015

Dead wrong

A real estate analyst recently wrote that “In the real estate industry especially, buy and hold investment approaches are in essence simple spread businesses. Spread means the difference between rental yields (in our example we took gross rental yield based on in place rents) and the cost of interest-bearing debt (CoD).”

This vision of real estate is as far as reality as one can be, and ignores that running a (permanent) real estate business is much more an operational task than a financial gimmick.

Ignoring the physical reality of a real estate asset (it is depreciating over time, and need much care an attention), is a proven recipe for disaster, and had led not so long ago to a substantial amount of tears.
Our approach to real estate is for and foremost operational. Our underwriting of real estate is unlevered, in order not to cloud our judgment with cheap debt, and easy money. alstria will benefit from the low interest rate environment in the future, and the implied increased carry on our assets. However, this is done on assets which have an intrinsic value, beyond the cheap cost of funding. This value is underpinned by business plan that rely on reasonable market assumption, and more importantly on the ability to implement this business plans. Not on the biggest fool theory.

This approach has allowed us to increase our FFO per share systematically over the last 5 years, and allows us yet again to guide to an increase for the year to come. Achieving this result was possible thanks to a strong investment in our real estate operations, the dedication of our people to operation of the assets and the emphasis we put on our sticking to our strict underwriting criteria. We see no reason to change this approach, as we believe this is the only sustainable way forward. Carry trade in real estate is a dead wrong approach.


  1. Great summary.

    Do you also look at replacement cost? What would be the replacement cost (per sqm) of your portfolio?

    1. Average construction cost in Germany for offices would be around EUR 1500 to EUR 1800 per sqm BGF (excluding the cost of the land). This obviously depend on the level of quality and sophistication you want to put in the office