Why invest in real estate

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Why invest in real estate?

• Peter Gage Morris
• Managing Director
• Ober-Haus real Estate

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WHY INVEST IN REAL ESTATE?

• Real estate provides the best way for ordinary
  investors to get leveraged, that is, to take a
  loan. By investing in real estate, an ordinary
  investor can own, control, and benefit from the
  income produced by an asset, while only investing
  cash worth a fraction of the assets value.

• Real estate has a relatively high rate of
  appreciation, historically, compared to inflation.

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WHY INVEST IN REAL ESTATE?

• Real estate, especially land, located in areas of
  high population growth (such as Warsaw) tends to
  appreciate much faster than inflation, as the
  supply of land is fixed while the population and
  demand is always growing.

• Real estate provides significant tax advantages.
  The deductibility of loan interest is just one
  such tax advantage, which lowers the effective
  cost of borrowing money. The ability to take out
  profits tax free through refinancing is another
  significant tax advantage.

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WHY INVEST IN REAL ESTATE?

• Real estate is an investment under the control of
  the investor. A smart investor can manage and add
  value to his assets, unlike stocks or bonds.

• Real estate has minimal downside. A house will
  never go bankrupt or lose 100 of its value -
  unlike shares.

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INCREASE IN PROPERTY VALUES IN POLAND
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WHAT WILL MAKE PROPERTY PRICES GROW HIGHER?
Seven key factors point to long-term growth

• All-time low interest rates

Low rates fuel demand. Over 2.1 billion EUR worth
of home loans were given in Poland in 2003, up
nearly 50 on the 1.6 billion EUR granted in
2002. Still, total residential loans outstanding
equal less than 4 of GDP, compared to over 40
in the EU. This means a lot more liquidity is
still to come.
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WHAT WILL MAKE PROPERTY PRICES GROW HIGHER?
Seven key factors point to long-term growth

• Growing populations

While countries as a whole are shrinking,
populations in the capitals are growing. In
Communist times a worker got roughly the same
salary in a small city as in the capital. Not
anymore. Warsaws population has arguably grown
half a million since 1991, and is still less than
5 of the country. When it reaches 15 (as in
most West European countries) its population
could be 6 million.
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WHAT WILL MAKE PROPERTY PRICES GROW HIGHER?
Seven key factors point to long-term growth

• Deteriorating housing stock

Most flats were built from 1945 - 1990. They
simply wont last another twenty years. And they
cost more to heat and repair than a modern flat.
When living in junk costs more than a mortgage
for a new flat, people will move.
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WHAT WILL MAKE PROPERTY PRICES GROW HIGHER?
Seven key factors point to long-term growth

• Strong GDP growth

With GDP averaging 4-5 per year for the last 10
years, Polands growth far outstrips the 0-1
rates in Western Europe. As per capita GDP grows,
so will asset prices.
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WHAT WILL MAKE PROPERTY PRICES GROW HIGHER?
Seven key factors point to long-term growth

• Strong real wage growth

The same goes for wages. With real wage growth
over 7 per year, and workers wages in Germany
moving in the opposite direction, it is only a
matter of time before wages, and eventually
housing prices, converge.
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WHAT WILL MAKE PROPERTY PRICES GROW HIGHER?
Seven key factors point to long-term growth

• Low unemployment

Forget about the 18 figures you read for
national unemployment. Joblessness in Warsaw is
less than 6, and probably lower considering the
unofficial economy.
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WHAT WILL MAKE PROPERTY PRICES GROW HIGHER?
Seven key factors point to long-term growth

• EU-phoria

People feel good - and secure - in the new
geopolitical reality. And they know the same
flat that costs 1,500 EUR per sqm here costs
three to five times that in the West.
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HOW CAN REAL ESTATE POSSIBLY GIVE A HIGHER RETURN
THAN STOCKS?
How much stock can you buy for 100,000 PLN?

• 100,000 PLN worth of stocks

How much real estate can you buy for 100,000 PLN?

• One million PLN worth, with a 90 loan-to-value
  mortgage from your bank.

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When you buy 100,000 PLN worth of stocks, what is
it worth?

• Exactly 100,000 PLN, because stock markets are
  efficient.

When you buy a 1 million PLN property, with your
100,000 PLN, what is it worth?

• As much as 1.3 million PLN. How? The real estate
  market is definitely NOT efficient. Most
  properties are bought and sold at prices
  somewhere from 30 under market value to 30 over
  market value. This means the experienced real
  estate investor, who looks at hundreds of
  properties a month and buys the most under priced
  properties, will be able to find properties worth
  1.3 million PLN that he can buy for 1 million
  PLN, by spending only 100,000 PLN.

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When you buy 100,000 PLN worth of stock, what can
you do to increase its value?

• Nothing.

When you buy 1.3 million PLN worth of property,
for 100,000 PLN, what can you do to increase its
value?

• Lots. You can repaint it. Renovate it. Build an
  extra garage. The returns on these investments
  are almost always higher than the return on the
  initial purchase.

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When your stock increases 20 in value, how much
money have you made?

• When your 100,000 PLN of stock increases 20 in
  value to 120,000 PLN, you have made 20,000 PLN.
  Thats a 20 profit.

When your property increases 20 in value, how
much money have you made?

• Your 1.3 million PLN property will be worth 1.56
  million after a 20 increase in value. When you
  sell your property at 1.56 million, and pay the
  bank back the 900,000 PLN you borrowed, you have
  made a 560,000 PLN profit on your 100,000 PLN.
  Thats a 560 profit

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WHICH TYPE OF REAL ESTATE INVESTMENT IS RIGHT
FOR YOU?
This depends on the circumstances and goals of
each investor, such as

• Amount of cash available to invest
• Income level desired
• Size of loan payments which can be served
• Investors tax situation
• Acceptable level of risk
• Investors objective income or value growth?

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The type of real estate you should invest in
depends on your financial profile
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TYPE OF REAL ESTATE YOU SHOULD INVEST IN?
Rental houses Good properties for starting
investors Usually high appreciation -
Possibility of negative cash flow during the hold
period
Rental flats Less expensive to start Easier
to sell when needed - Management required
Land No management required - Harder to
leverage - Cash flow negative during hold period
Office or Retail buildings - For larger
investors - More susceptible to economic downturns