Christoph Kahl - JAMESTOWN
Kahl is the founder and majority owner of Jamestown LP, far and away the most successful investor in the US on behalf of tens of thousands of German retail investors.
At the recent Quo Vadis gathering of top German real estate players in Berlin, event moderator Karsten Trompetter talked one-to-one with investing legend Christoph Kahl about lessons Kahl has learned from 35 years in the real estate industry.
Kahl is the founder and majority owner of Jamestown LP, far and away the most successful investor in the US on behalf of tens of thousands of German retail investors. The company currently has more than $11bn of assets under management in the US, and from investments of $2.6bn has delivered more than $5bn in returns to more than 70,000 German retail investors across 29 consecutive closed-end US core funds.
No Jamestown fund has ever lost money for its investors. Significantly, Jamestown sold 75% of all its holdings in the 12 months prior to the onset of the financial crisis in 2008, and re-distributed the proceeds to investors.
Among other things in a wide-ranging discussion, Kahl said the following:
On Jamestown: We view ourselves as an American company, albeit with German roots and a presence in Germany. We have 140 staff in the US and 40 here in Germany, but we run the business as a 'Mittelstands' company, despite the volume of our business in the US. We don't view ourselves as a fund manager or initiator, we see ourselves as a real estate company that gathers up its capital through funds – but the property itself is the focus. This hands-on approach is really important to us.
On New York, where the company has a number of properties: New York City has always been an expensive market, and yet we've always made more money in New York than anywhere else. We've often had opportunities to buy inexpensively, and it's true that the best buildings aren't necessarily the most expensive. But what really counts is to identify what buildings will be really GREAT in five years time - and to see if we can get those assets NOW at the right price.
On Development: We don't do any ground-up development, we don't build new. We look for assets which we can really do something with. Our speciality has become really big properties of 100,000 or 200,000 sqm, perhaps 100 years-old, maybe a warehouse-style property with high ceilings, big open spaces, perhaps without functioning air-conditioning or other infrastructural weaknesses meaning a high capex requirement. We've has several big successes with these kinds of properties – particularly where the capex requirement is so high that others can't or won't take on the project.
A good example of this was the Falchi Building in Long Island City, New York, where the rents were a third of those in Manhattan. We paid less than $1,000 per sqm, but we had a high capex. Then we built a food hall in ground floor, and tenants were prepared to pay two or three times the previous rent. With that you're half-way to justifying your investment. (Jamestown paid $81m in April 2012, and after upgrading and refurbishing, has just sold the building for $260m).
On Finding Tenants: We really think it's about finding an asset with character, a property that young people will be drawn to and want to locate their companies in. These tend to grow much faster. Then you've got to make the ground floor really attractive, and of course make other appealing offers, just as we're doing now on a new project in Boston (viz. the cultural and culinary variety at the Innovation and Design Building in Boston's Seaport district).
It's important to create something that isn't the usual mall, or Einkaufszentrum, or airport shopping area, where everything is interchangeable and boring. It needs to be largely a Makers Market, with unusual products and small stores at below top rents, offering visitors a different experience. And food is a key ingredient in the mix – but not the usual food, no chains, largely local offerings. The Chelsea Market in Manhattan is a great example of this, which brings in plenty of really smart young people.
On Food: Jamestown has over 200 food companies in our properties in the US. So we have an in-house company advisory dedicated to helping the food tenants in our companies to maximise their revenues. The service is free for the tenants, but it's good for us, because we have a stake in their turnovers. Our tenant's success is also our success. This means we need to have people on our team who are very close to the whole food scene.
I think this form of close partnership with tenants might not be quite so developed here from what I can see, but in our experience it paves the path critically for easier negotiations later.
On Fund Managers: In my 35 years in the business I've often had the impression that many fund managers are phoneys whose primary concern has been their own quick profit. They promise a lot, drum up as much money as possible, and quickly concentrate on getting the next fund up and running.
In my view this doesn't work for investors, it doesn't even really work for the fund managers. There's nothing long-term about this, it's not a sustainable business model. You need to promise less than you can deliver, you need to really look after your investors and you need very transparent communication.
On Lessons for Germany from the US Property Bust: All I can say is that, when all the traditional rules of the property investing business are seen as no longer valid, when no proper due diligence is being done, or when an unlet space is valued more highly tha a let one, as we saw happening in America – then there's trouble ahead.
On Transparency, in Germany and the USA: We often take the approach in Europe that, as one-eyed individuals, we can find enough blind people whom we can persuade to do business with us.
In the US, it's much more like two all-seeing individuals negotiating with each other, both with a high degree of information. It is much more efficient, it's better for everybody, and it's better for the market. I would suggest that the German market by contrast is not very transparent, prices aren't often made transparent, rents aren't disclosed, etc. Everyone seems to believe that they benefit from this. It's wrong, the very opposite is the case, as my years of experience in the US convince me.
Secondly, the degree of professionality. We're all aware of how much money is headed towards real estate investment in Germany. Many of these investors will have to get used to the idea that, for example, there is no standard software for the properties or for the market here. There is no unified software – everybody walks around with their own specially-created Excel spreadsheets. In North America, they have Argus software which instantly gives all relevant details for the complete building to all participants, partners, bankers, brokers and others to analyse the property. Frankly, it's much more professional.