The Theory of Investment – In a Nutshell

By: Adv. Elhanan Yashar

Amateurism is Available – But not worthwhile

The examination of long-term investment is based on parameters unknown to all.  Comparing the information appearing on the web often turns out to be amateurish.  Just as the value of an internet based medical diagnosis is lacking, so is investment information.

After reaching website headlines, dramatic increases in share prices following a defining event in the stock market usually already reflect the grand shift upward or downward.  Thus, whoever was exposed to the information and expected to make a profit on the event – based on the headlines – has often been disappointed.

Only consistent research and monitoring of shares can prepare the ground for the turning and breaking points for sales and acquisitions.

The principles for evaluating investment alternatives often make way for “trends” seen by a non-savvy investor who is often influenced by concealed PR, lacking or unverified information.

Nowadays, when almost every page on the internet contains at least one advertisement on investment property around the world, it is more important than ever to avoid investing according to the media hype and to comprehensively review the investment alternatives, applying an educated and balanced choice.

“An expert is a man who has stopped thinking - he knows”.  (Frank Lloyd Wright

Investment Triangle

Every investment must be reviewed according to the three sides of the “investment triangle”, which demonstrates the principles for wisely initiating an investment and the forecast of a positive or negative yield.

The said parameters are risk, chance and professionalism.

Risk

Contrary to the method applied by the impulsive investor, who will first evaluate the potential for profit, the first side of the “investment triangle” is actually the risk side.  The first question to be asked and determined is: What is the investment’s risk exposure?

This is the measure taken by investors who understand that the investment principal consists of the fruit of many years of labor, on the one hand, and their short and long-term financial future, on the other.

The questions that every investor must ask are: “Where is my money? What will I own?  Who is my ownership partner? What am I buying?”  In real estate, the answer should be that the proposed asset is a stable property in a stable location, yielding a stable income.  A stable income is the basis for a safe investment.  Income plays a major role in maintaining the status quo and creating a steady cushion for the investment.

Why Germany?

Germany, the world’s third largest economy and undoubtedly the strongest economy of the Euro block, offers a general answer regarding location.  In Germany, as in any other place in the world, it is important to evaluate the specific location of the proposed investment in order to understand the extent to which it exemplifies the country’s stability.  It is important to avoid settling on a bad neighborhood in a good city, but rather prefer an investment in a good neighborhood in the adjacent periphery and a strong population with a steady income guaranteeing a long-term yield on the property, thus maximizing its evaluation potential.

Today, Germany offers rare investment opportunities.  The culture and mentality of the German population provide fertile grounds for acquiring a yielding asset at a low cost that does not reflect the stability, security and potential of investing in Germany.

What are those attributes and what are the cultural differences between the average Israeli and German, which the investor can leverage in his favor?

Approximately 50% of all German residents rent their apartments as a way of life.  In other words, 40 million Germans pay rent.

This is not a weak, hardened or low-income population.  These are people who earn a salary that is higher than the Western European average while, on the other hand, the cost of living – including average residential expenses – is lower than the overage in those countries, at a substantial difference.

As a welfare state that provides its citizens with a safety net, every unemployed German under 25 is entitled to an unemployment fee unlimited by time.  The unemployment fees include a separate payment for housing and related expenses.

Perpetual Yield

Germany provides an absolute solution to the “risk” side of the triangle.  As a strong country, whose citizens enjoy financial well-being and the lowest average cost of living in Western Europe, with a steady rental market characterized by tenants who opt to rent their apartments and are not forced to do so, and a wide welfare net that provides, inter alia, lifetime rental expenses for those who cannot afford them.

Therefore:

1.    The low real estate prices in Germany are not the result of an economic failure or weakness.  The prices reflect a culture and mentality difference by which rental is a routine option.
2.    As a result, tenants are not financially unstable but rather the opposite.  Based on a high average salary and low cost of living, rental payments are deposited with “German” precision.
3.    Rental periods are usually long-term, without frequent tenant turnover.
4.    Tenants pay on time and not just because of the German order, but also and mainly because it is easy for them to pay, whether they are employed or not.

 

We could continue presenting parameters of investment security in this section.  For example, the existence of laws that create a balance between the property owner and the tenant, enabling the tenant to feel at home, or other welfare-related issues, such as a children’s allowance of €184-215 for children under 18 or 21 if unemployed, or under 25 for students.  Not to mention the academic tuition in Germany (there is no such thing… studies are free).

Germany is the optimal location for neutralizing the risk side.

It is only after exhausting the risk issue that one can turn to the third side of the triangle: Chance.

German connection to the global sub-prime crisis

Over time, real estate investments demonstrate ups and downs.  Over the past decade, many countries have reported meteoric increases in real estate prices.  On the other hand, real estate bubbles have burst throughout history and shall burst again in the future.  That is the nature of a cyclical market.  The trick is to identify the near-extreme points and manage the investment accordingly; consider investing at a historical low point and, at a historical peak, consider exiting the investment and realizing profit.

Indeed, only fools can prophesy; only a clairvoyant can pretend and predict the low or high point of the market and, if there is one among us, please step up.

However, without predicting the future, it is safe to confidently evaluate the current times.  Thus, for example, we can review a general trend and compare it to other locations around the world, thus assessing the chance of property evaluation.

Back to Germany.

Before the 2008 real estate crisis, German real estate prices were not influenced by rising global prices and they remained static for over a decade thanks to a culture of residential renting.

 

Comparatively, the price of an average apartment in Israel can still be used to buy a small house in Germany.  And no, our economy is not stronger, our security situation is not great and the mortgage interest in Israel is not cheaper than it is in Germany.

The 2008 crisis, which led to the real estate collapse in the USA, Ireland, Spain and even in England and others, served as the trigger that ignited the German real estate market.  Germany was suddenly revealed to the foreign investors.  Many investors around the world were worried about their money, afraid of the banking system and apprehensive about the future - the stock market became a speculative, volatile and dangerous venue and many sought a financial shelter in which they could safely invest their money.  Some indeed fled to the oldest known shelter – gold, whose price doubled.  Others discovered Germany and felt as if they discovered a new continent.

Golden Betonage – Concrete is German Gold

The strongest country of the Euro block, offering the lowest prices in the western world, offers a safe financial shelter.  There is a good reason that the local realtors coined a new phrase for the real estate market – “Golden Betonage” – Concrete of Gold.

Indeed, since the crisis erupted, the prices have moderately and consistently increased, demonstrating the beginning of the upward trend ahead.

At present, in 2015, apartment prices are embarking on a long and steady journey of increasing prices, after decades of no changes at all.  The prices still have a long way to go, other investment alternatives offering such a high confidence level yield minimal returns.  The value of the assets, compared to other investment alternatives or real estate in other countries can easily double.

In closing, the “Chance” side of the triangle – current real estate prices in Germany – provide a purchasing opportunity that should not be missed.

 

 

 

Capital takes Experience

Professionalism

When purchasing real estate overseas, the issue of professionalism plays a major and critical role seeing that “location” is an issue that the amateur investor cannot find without professional help (try explaining to a foreigner the difference between prices of assets in Lod and Tel Aviv, separated by 10 Km only).  Further assistance includes working with the financing bodies, the authorities and property management.

Before entering an investment, it is important to ask the right questions:

Who is your partner?

Who is managing your investment?

How many years of experience does he have?

How well does he know Germany?

What kind of service will you be provided over the years and who guarantees it?

Who arranges your legal rights and who guarantees your money until then?

 

The author is a lawyer specializing in legal and economic due diligence for real estate in Germany, and a partner at Golden B.