Marcus Cieleback (Patrizia): We have to relearn real estate

Published: 17. 10. 2023

I was intrigued by your job title at Patrizia: Chief Urban Economist, as opposed to Chief Economist. Focusing on the economy of cities will give you a different window into the type of investments Patrizia is going to make.

Ultimately as an economist I think we got a little carried away by too much technical analysis of macro data. Because if you look back in history, economics has always had a strong integration with economic geography. There are a lot of things today that are studied more in geography and urban studies, but historically they were seen as related to economics.

Does this give you more credibility when you talk to cities about things like residential policy and rent regulation?

I think the challenge here is that when it comes to talking with cities, the image of our industry isn’t the best. Reaching politicians is one thing but enabling them to change the laws is another thing. Very detailed rent regulation like rent caps is bad from an economic point of view, but from a political economic point of view it’s understandable. I think the point [of my job title] is that merging geography, city and classic economic thinking from a political point of view helps you to better understand why things are happening as they are. It also shows you the limits of what you can influence.

What is it that cities or countries should be aiming for to make housing more affordable than it is at the moment?

We know that rent regulation is a challenge. But I wouldn’t say that it’s a bad thing per se, because regulation also creates predictability — it creates some kind of stability.  There’s an argument to have some kind of regulation in place because landlords are always a bit more powerful than tenants. But overall, it’s a supply-side issue and that needs bipartisan or cross-party support. That’s the big challenge. We think in four-year electoral terms whereas today’s problems emerged over the last 15-20 years. So, we need a 10-15 year plan to solve them.

Do most cities leaders understand that increasing urban density is not only economically efficient, but it provides a way to produce more residential?

Density is always a challenge because it has a negative image for many voters. We have to think about density in a new way, not like the concrete silos we built in the 1970s. Density today can be much more diverse, much more open. Look at The Interlace in Singapore with its linked rooftop gardens.

Flexibility requires a different approach by investors. Like, not insisting on a 20-year lease, to lock in a 5% yield to make something that looks like a bond. The more urban diversity you get within that density the more flexible an approach it takes. Excel jocks don’t tend to understand that.

Definitely. We are coming from a period when we sold real estate as an alternative to a government bond, which it is not. And we now have to re-learn real estate. First of all, what is real estate? It’s a management-intensive, low-correlated, stable income product with some inflation protection. The other thing we have to learn is that it’s not siloed into offices, retail, and resi. It’s a mix. This will need the re-education of many investors. What does it mean for your portfolio if you look at the building as a mix of resi, office and retail and maybe even some logistics on the ground floor? These are the challenges to re-educate people after a low-interest rate cycle that made us all believe we have the alternative to the government bond.

With ESG in mind, there’s a need to improve our existing stock, meaning we have to spend capital on it. Therefore, we need to decide what the future role of real estate will be from an investor point of view, from a city point of view and from a public point of view. We have a hell of a lot of work in the coming years to get all of these things aligned.

There’s a tendency at Expo or MIPIM for investors to complain how the politicians “don’t get it” and the public “doesn’t understand.” But everyone probably has some relearning to do.

For me that’s possibly my biggest take-away, that we really have to re-learn real estate. That’s not an easy task because a lot of people entered real estate (including our investor base) in the last 10 or 15 years. They’ve never seen a period like this with relatively higher interest rates – and they’re not even high if you take a 30- or 40-year horizon. But we have to learn how to adapt to this new environment and how real estate is in a different position today. This is something that will take a while and will have a huge impact on the industry. It might change the industry. It might shrink it in some ways and grow it in others. That change won’t be easy, but it’s a prerequisite if we want to achieve something from an economic, ecological  and social point of view.

Property is seen as a hedge against inflation, a safe investment. But some people get into real estate to get rich. There’s a tension between those two functions.

If you simply wanted to get rich, you had a good possibility via real estate over the past ten years. I’m not denying it. It was an easy way by high-leveraging your collateral for many people to jump on that train. But that’s not the fundamental idea of real estate. People have to realize that the train is going a different way now. It goes up and down and sometimes it takes turns along the way. We have a huge opportunity to come back to what real estate should be.

And this links nicely back to the city. Cities emerge over centuries because they are places of opportunity. They’ll still be there in a hundred or two hundred years. So, now you have to go back and look at real estate as part of that long-lasting evolution on the city level. That means a city isn’t a quick fix for your wealth position. It’s not a quick fix for your portfolio imbalances. It can help you, but we have to learn again that it can only help if you look at it on a 10-, 15-, or 20-year horizon. Not think in 5-year excel sheet columns. This is maybe the point to be honest and humble to see that we have to change again.

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