What do you think of these real estate portfolios?

Hello,

What do you guys think of these two real estate fund portfolios ? For example in comparison with your direct real estate investment(s) or one you would consider. I need to check if I am not completely crazy.

Value of buildings according to real experts : V
Mortgages (M) : 34.39 % of V (now at an average interest rate of <1%)
Disagio (what the seller is giving you for free) : 13.91% of V.
Price asked by sellers (P ) : 51.69 % of V (78.79% of V-M)

Soll-rent :
4.22% of V
4.9% of P+M
8.16% of P

Ist-rent
3.73% of V
4.33% of P+M
7.22% of P

2019 Annual result (after interests (who were higher), maintenance, most of the taxes etc), not including change in value
1.39% of P

Value of buildings according to real experts : V
Mortgages (M) : 19.79 % of V (negative rate) 
Agio (the premium you pay to the seller) : 5.71% of V.
Price asked by sellers (P) : 85.92% of V. (107.11% of V-M)

Soll-rent : 
4.65% of V
4.4% of P+M
5.41% of P

Ist-rent
4.3% of V
4.07% of P+M
5% of P

2018-2019 Annual result (after negative interests, maintenance, literraly all of the taxes etc), not including change in value
2.8% of P

I think you do not say everything because real estate is not only numbers.
Residential or commercial?
Residential: well located in large cities in Switzerland or more off centered?
Residential: new building or old with potential high renovation cost?
For the first object I am surprised by the diagio. Disagio respective to what, official value of building, SIA cube calculation, fire insurance value, last transaction price, anything else…

All in all, if you live happily with an annual result between 1 and 2.5% of the value of the building why not. But we wary that buildings do not last for ever and as investor your life expectancy is even shorter than the expectancy of the building.

Good luck!

You’re right, I forgot to mention it was mostly residential. They are in cities of… hum… differents sizes, but that is already reflected in the valuation and the losses on rents (not the only factor or rent losses of course).

The buildings’ age varies and it looks to me that the funds are actively renovating more often than individuals because they have no money constraints etc.

The value is estimated with the DCF method by experts approved by FINMA and must respect LPCC and OPCC so it is as good as it can be. The number of differents buildings probably limits the valuation “errors” comparing to a single building valuation.

The first method I developped was a mix of (1) the average increase of NAV and distributions after taxes, discounted at different rates depending of the type of real estate and (2) the NAV, with a small bonus for wealth tax savings for the funds that owns directly their buildings . It gives me a price to buy and a price to sell. Of course I am not buying if the agio is too big, even if the model tells me it deserves it.

After I backtested the model, it looked to work those last 5 years, even if the market is “irrational” on the long term. I didn’t take into account how the leverage was responsible to the success, because OPCC forbid to go over 33% mortages in general, so it is usually 20-33%, that means the “same” for every fund in average over time.

That is exactly the question I am wondering. The result is not everthing, and it varies a lot compared to other numbers. I now want to investigate more into the differents factors and numbers to have an alternate method of valuation or at least comparison. Why does a fund overperformed in term of NAV those last years ? Is it because it found a lot of tenants for empty units ? Is it because it was able to refinance a good rates after years of really high interest rates compared to others ? The cash flow they use for valuation of the NAV doesn’t take into account the interest rate, because they basically estimate the cash flow including renovation of the next 10+years, rent on the newly created roof-units etc. independantly of the leverge. And then they sum all the building and cash and simply substract the debts irrespective of how good or bad they are.

I think the comparison with direct investments could help me understand if the intrinsec qualities of the buildings are better than the average (for example because of the size) or if low leverage has a real negative impact compared to a higher leverage in direct investment etc.

13.91% according of the total asset value calculated by experts with DCF method
21.21% (100-78.79) of the NAV.

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