Real Estate Business Can Stink

The real state business has created many big financial crisis. We saw one in 1980 in Finland, we saw them before that in London and Paris, and the biggest one so far was in the United States in 2007 and that caused the global financial crisis.

It should be no surprise to readers that Donald Trump is just the sought of person you find in the real estate business.

But in today’s markets we can see many examples of interesting, but really bad, examples of how rotten dealers are moving around this market and taking home big profits at the expense of others…

… and you so not have to be surprised that the Catholic Church has been found to be investing money in renovated building in what must be the most expensive area of London, in Sloane Avenue in Chelsea. It is hard to understand why money that has been collected from ordinary parishioners is being invested in the world’s most luxurious apartments, offices and shops that only the wealthiest can afford. The rents are said to be around €450 a square meter on par with the most expensive parts of New York and Paris.

Why do they not use the money to help the poor and needy – I have often wondered why these churches put the comfort of their bishops and priests before the plebs, but they are running a business, aren’t they… and one that appears to be as crooked as hell… because it appears that they are either not very good at running that business or perhaps they are just crooked. They appear to have invested some €200 million in this project and ended up giving their “fund manager” a profit of more than €100 million! But perhaps he really was a needy person from a humble background.

There is also the case of one of the Finnish churches. This church owns most of the land on a small island near the centre of Helsinki where there are many apartments and family houses. The church has hiked up the rents the residents pay for renting the piece of land on which their homes are built. The price hikes are well beyond what is reasonable and have cause hardship. The Brits have a hymn that they sing in church on Sunday morning “Onward christian soldiers, going as to war” – a very suitable piece that fits this story…

But now the Finnish banking boys have jumped on to this band wagon in Helsinki. They have started to create “investment funds” the sole purpose of which is to own land on which a construction company builds apartment blocks. The investment fund charges an annual rent in perpetuity from the housing company that owns the building. The people who buy the apartments normally do not read the sales prospectus carefully and probably do not fully understand the Articles of Association where it is said that they are individually and jointly liable to pay the rent. There is also a pledge on the property as security for future payments. The investment fund has basically no other obligation than to collect the rent and decide once a year of increasing the rent in line with he chosen inflation index, and on the value of the land if all of one of the residents wants to buy out his share of the investment fund.

Naturally the investment fund charges whatever it can get, just like the church that demands its pound of flesh…

Here is a copy of the latest prospectus that came in the post the other week from one of these investment funds:

  1. The current investment of the fund is €30 million… and… there is strong demand and a good supply of plots.
  2. The fund invests in zoning residential plots of Finnish growth centres where the housing company is a tenant. This low risk investment solution generates an annual cash flow return of over 5% for investors.
  3. Rental yields are inflation and deflation-protected because the annual inflation adjustment by the cost of living index is made at both rent and redemption prices. Land rent and redemption price of land lots cannot fall.
  4. This is a low risk investment:
    1. The housing company is responsible for renting the land
    2. Mortgage liens are granted to the fund with the highest priority
    3. The housing company pays the property tax on the plot
    4. Cost effective to manage
    5. No vacancy, tenant management, renting or brokerage costs
    6.  No interchangeability, rent collection, arrears or repair investment needs
    7. Avoid housing inspections and repairs
    8. Highly predictable cash flow
    9. Return on investment is not dependent on house price development
    10. Political uncertainties and protracted trade disputes are eroding faith in the stock market. The anticipated stimulus measures by central banks have also made fixed income investments less attractive. High-quality alternative investment offerings play a key role in the pursuit of low-risk, solid cash flow returns.

Given this type of activity it is little wonder that house prices have increased by over 15% during the last 4 years. There is no need for bankers and “investors” to slice and dice housing like this. it is costly and adds no real value to the market.

The costs of buying a home in Helsinki are already beyond the means of ordinary young people who do not have well-off parent to support them. 

It is terrible that the government and the main political parties are not trying to limit these activities  in the major cities that are already suffering from a lack of labour supply. It is no surprise that economic growth may be faltering. 

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