Who’s afraid of liquidity?

No investor likes to leave their money lying around for long. Large cash holdings reduce total returns and can even cost money because of negative interest rates. This leads to investment targets being missed, much to the chagrin of long-suffering investors – at least that is the common opinion. In today’s investment world, creating long-term value is nowhere near as important as achieving short-term return targets.

In market situations such as the current one, however, investors have to reassess their priorities. It can and must be possible not only to hold cash reserves in the short term, but also to park it for a couple of years without worrying about earning any interest. This contradicts some basic investment principles; it also calls for a lot of patience and trust. But in the long run it pays off – just ask Warren Buffett.

Investors who are patient and under no pressure to invest their capital immediately have several advantages. They can, for example, decide to purchase individual properties rather than feeling forced into larger portfolio deals. This may not be a particularly common approach, at least not when we are talking about very large sums of money. After all, buying a portfolio is a much quicker way to turn substantial investment capital into income than buying individual properties. Finding and acquiring individual properties, on the other hand, requires more research, is more time-consuming and involves multiple rounds of negotiations. This makes the whole process more difficult, more arduous and drawn out. Nevertheless, this strategy is more profitable in the long run.

No portfolio that comes to market is ever perfect. Generally, any portfolio contains at least some properties that most investors would turn their noses up at if they came up for individual sale. This is accepted because the overall package is attractive enough and because investors, in today’s market environment, are short on alternative options for investing their capital even at low yields. A large portfolio can still be profitable, even if it does contain one or two bad apples. Nevertheless, these bad apples naturally have an impact on the bottom line, reduce total returns and potentially add risk to the portfolio.

It’s a bit like the equity business: an ETF on the MSCI World Index is certainly a good idea for a small investor. As a professional, however, you primarily select hand-picked securities for your portfolio. Real estate investors need to adopt a similar approach. In order to optimise returns from this strategy, investor need in-depth, local market expertise and access to a broad, high-quality professional network in order to obtain the right properties at the right prices. Once everything is in place, and with a slightly longer investment horizon, you will find that you can generate better returns from a large number of smaller deals than you can from a small number of larger transactions.

A patient investment strategy without any immediate pressure to earn income on your investment capital has another advantage: you are more likely to be able to take advantage of attractive investment opportunities as and when they arise. If there is a market correction, you can use your cash reserves to pounce on market opportunities large and small. At moments like these, investors who are caught flat-footed are at a distinct disadvantage.

Patience can certainly be a virtue – even if it means temporarily accepting negative returns on a portion of your capital, because investing for the sake of investing is always a bad idea. A few years ago, almost every investment in the German real estate sector paid off. As the market has shifted, however, the level of risk associated with real estate investments has increased and investors are beginning to appreciate the benefits of parking their capital until they are ready to deploy it on targeted investment opportunities.