Cardano's Richard Urban uses the story of Huckleberry Finn to encourage real estate investors to pause and reflect on their own decision making instead of blindly following "the wisdom of the crowd".
"Whenever you find yourself on the side of the majority, it is time to pause and reflect " – Mark Twain
As a child, Huckleberry Finn and Friends was one of my favourite TV programmes. Set in the early 19th Century and based on a book of similar name by Mark Twain, the eponymous Huck and his best friend Tom Sawyer follow their innate spirit of adventure and willingness to take some risks, to embark on a series of escapades in the deep south of the US. Their travels ultimately take them far from home but in addition to the sense of freedom and excitement they were seeking, they encounter a number of unexpected situations which lead them to experience fear, regret and despair.
For those of us involved in the real estate markets over the past decade, there are some instantly recognisable parallels between our own experiences and those of the two Mississippi-based scamps. Of course, I'm not talking here of trying to steer a makeshift raft whilst desperately trying to avoid paddle steamers. Or perhaps, in a metaphorical way, I am. But what is for certain, is that the roller coaster ride of the real estate market's recent highs and lows has been mirrored in the psychology of investors. Fear is a powerful driver of investor behaviour and the volatility of the past few years has led to the majority of investors clamouring for the safety of dry land.
In practice, this has meant high demand for prime property, and particularly long lease property. This strong demand has pushed valuations for such assets back to the pre-crisis highs. Just as Huck reflects on how his own experiences have shaped and educated him, Twain encourages us all to 'pause and reflect' on our own decision making, especially when it is in step with the majority. Challenging the wisdom of the crowd is never the comfortable option but is necessary as we all strive to become better investors. In the ongoing rush and push for safe property assets, how many investors have considered a very different approach?
There have been a number of 'pause and reflect' moments during the formulation and execution of Cardano's real estate strategy. Most recently, we have questioned the value of buying prime property in the UK. In particular, we identified a number of niche strategies, which we believe can produce much more attractive returns allowing for the risks involved. These include 'loan to own' (where the aim is to convert property debt into an equity stake) and discounted property equity investments in the UK. Transactions are sourced from non-traditional holders of real estate, such as property receivers and banks. Whether by loan or equity routes, the strategy is to access properties at below replacement cost, create value through asset management initiatives and sell into the prime market where there is strong demand.
Other pause and reflect moments came earlier in the cycle. As the Lehman Brothers collapse unfolded in Q3 2008, the US structured finance market and UK property markets were already in decline. At the time, we were in agreement with the majority of the investors that the world was in a very uncertain place and some potential outcomes were catastrophic. Although we had a negative view on the market environment we identified a theme of 'forced deleveraging' (debt reduction) and sought out opportunities that would do well in this environment. Suspecting that many equity and mezzanine debt investors would be severely impacted, we focussed our attention on senior debt.
We first invested in mispriced good quality mortgaged backed securities in the UK, Europe and US. Later we identified opportunities to invest in senior loan and construction loan recovery strategies in the US. Crucially, across all of our strategies we focus on barriers to entry, supply/demand imbalances and asymmetric returns, i.e. downside protection and attractive upside potential.
When Huckleberry Finn set off on his travels, he didn't have real estate investment in mind. I don't think that Huck would have ever heard the phrases 'asymmetric returns' or 'risk adjusted returns' but you can bet that his risk taking was designed to give him as many good days as possible and few bad days as possible. What better investment strategy could there be than that?
Mark Twain was an outspoken proponent of all that he disagreed with but he was also not afraid to change his view. He certainly imbued Huck with those traits, demonstrating that a strong character and self-reflection are not mutually exclusive. Neither Huck nor his creator followed the crowd where they had greater conviction in their own path. Contrarianism for its own sake is folly but all real estate investors can take inspiration from Twain: Whenever you find yourself on the side of the majority, it is time to pause and reflect.
Written by Richard Urban, property investment manager, Cardano UK
R.Urban@cardano.com
