Investors often try to profit by betting on short- and medium-term shifts in stocks and bonds. The real money, though, often comes from anticipating long-term trends, the kinds of changes that take place over many years. It’s a strategy with which real estate investors are well-acquainted. Real estate by its nature is a long-term investment that depends on several-year operational strategies and even slower-moving demographic trends. Now that sector is proving to be one worth watching – and emulating – from a strategic perspective.
An Increasing Push for Long-Term Strategic Plans
Many observers have noted the danger facing companies that focus on near-term results at the expense of a longer-term strategy aimed at dealing with the surrounding competitive environment. Now, prominent money managers are joining the push for businesses to develop detailed long-term plans, and in some instances are even pushing for companies to stop providing quarterly earning estimates.
“CEOs should be more focused on demonstrating progress against their strategic plans than a one-penny deviation from their earnings per share targets,” said Laurence D. Fink, co-founder and CEO of BlackRock, the world’s largest investor with over $4.6 trillion in assets under management. “Communications to shareholders are too often backward-looking and don’t do enough to articulate management’s vision and plans for the future.”
A Company Affected by Investor ‘Short-Termism’
Sometimes broader market forces require companies to suffer through a few down quarters even though its underlying business, or assets being managed, may be doing fine. The Blackstone Group, for example, is currently suffering from a lower stock price due largely to the volatility in its profits – which are in turn correlated with its ability to engineer successful exits from its various investments. Those sales of company and real estate stakes can be a difficult task during market downturns. Yet “we remain highly profitable with strong growth and limited downside,” said Stephen A. Schwarzman, Blacktone’s CEO.
Other observers agree. “Over the longer-term horizon, (Schwarzman) is going to be right,” said Glenn Schorr, a longtime financial analyst with Evercore, an investment bank. “I don’t think it is up for debate that the business model is great and that the company will continue to grow. But these alternative managers are super volatile, and they suffer from whims of the market.”
Warren Buffet is perhaps one of the world’s most famous “long-term” investors. Buffet wrote that when he and his partner Charlie Munger buy stocks, they think of them as “small portions of businesses” and try to see the earnings power of these businesses over the next five years or more. “In the 54 years we have worked together, we have never forgone an attractive purchase because of the macro or political environment,” he said.
Parallels to Real Estate
Real estate underwriting – and investing – is generally built around the nuts-and-bolts business of evaluating a property’s specific business prospects, in view of comparable properties and reasonable judgments on macroeconomic prospects. Pretty boring stuff, really – and not very focused on the fad and fashion of the current month.
That’s because real estate is, by its nature, a long-term business operation. Buildings take time to build, and leases expire and get renewed or replaced over time. Real estate supply and demand adjustments, too, sometimes occur over years rather than weeks.
Real estate is also subject to greater “friction” than many market sectors. A sub-quality building coming on-line during a “hot” market may obtain long-term leases and, later on during a market downturn, stay fully leased – even while a newer, flashier building more recently completed languishes with substantial vacancy and poor rents.
Over the short term, too, there may be issues that affect cash flow. A roof may need more repairs that had originally been thought necessary. An expected lease may fall through. Investors should certainly expect to be kept aware of such material changes in business operations. “Long-termism should not be a substitute for transparency,” cautioned Fink.
Still, if the property’s location and overall operational strategy remain sound, then short-term roadblocks are often overcome with the passage of time. Renovation projects, in particular, usually involve situations where supply/demand data are relatively well understood and specific “product” changes are planned for the short or medium term that will help the attractiveness and marketability of a specific property.
Even in these cases, however, things can sometimes move slowly. Real estate is by its nature is a long-term investment – so it is important for investors to understand the long-term strategy of any project or fund.
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