The Liquid Strategy team have looked at the basic pillars of Multi Billionaire real estate investor Sam Zell’s methods to understand how we, as a company and our clients can learn from him.
The demographics
Sam Zell is a confessed slave to the old law of supply and demand. Over the past decade, he has gone around the world in search of markets where the forces of demographics offer perspectives of greater returns than those found in rich countries.
Mexico was the first target. In 2002, when the country's real estate market was experiencing deep transformation, mainly driven by the explosion of low-income consumption, Zell bought a share of the popular constructor Homex. This share was completely sold in 2008, with an estimated profit of around 1,000%!
The second target is Brazil. The magic of numbers attracted him: the country needs 10 to 13 million dwellings to meet already existing demand, and Zell believes this will generate good opportunities in different segments of the real estate sector. Starting in 2005, Zell invested in a real estate developer, a mall administrator, a low-income constructor, an investment group and a finance company, Brazilian Finance. "Many real estate magnates don't pay the required attention to demand. They let themselves be caught up in complex premises and make disastrous investments," says writer Ben Johnson, Zell's biographer. "He invests based on simple ideas, and Brazil is a very simple idea." Think long term Zell has at least one thing in common with investor Warren Buffet, the world's second richest man. Both hate undoing their investments. "When you are an optimist, you never think it is time to sell" Zell says. He believes an investor who wants to make money with real estate needs to have patience when facing market oscillations, and only sell when he gets what Zell calls the "Godfather's" offer: one that cannot be refused. That is what happened in 2007, when the Blackstone fund offered 39 billion dollars for Equity Office's 585 buildings.
Don’t hitch a ride on other people's enthusiasm
Over the past decades, Zell has participated in quite a few real estate market cycles. And he saw that the worst business deals are made at the peak of waves of optimism. That is when those projects emerge that will work "because prices will continue to go up". Zell avoided some embarrassing moments by running away from those types of deals. In the 1970s, in the middle of a bustling period of construction, he decided there would not be sufficient demand for so many properties. He stopped buying and opened a company specialized in administering bankrupt projects. "The most common mistake is hitching a ride on other people's enthusiasm," he says.
Before investing in a company's stock, get to know its executives
Although he became rich dealing in real estate, a good part of Sam Zell's money is used to buy shares in companies. "We don't invest in many companies, but rather make large investments in a few." He finds one issue fundamental: look for companies administered by executives who also feel like owners. "They need to have a good part of their assets invested in the company's stock," says Zell.
See which side the market is leaning and invest in the other
Zell built a solid reputation as an investor who goes "against the grain". In the 1960s, he made money investing heavily in secondary cities in states like Kentucky and Wisconsin, abandoned by other investors. Then, he made a series of successful investments in bankrupt companies, which created his fame as a "grave dancer". By definition, this strategy has many more risks. After building his real estate empire, Zell began to systematically invest in several other segments outside the real estate market, from insurance firms to baseball teams. One of his biggest investments was the purchase of the Tribune media group for 8.2 billion dollars in 2007. It seemed crazy to invest so much in a decadent sector, but Zell decided, once again, to go against the tide. So far, it has gone all wrong. The Tribune filed Chapter 11 in 2008, and has still not come out. But Zell's conviction remains unshaken. "Conventional investments bring conventional returns," he says. "Look at the list of the world's greatest entrepreneurs. How many got rich following the herd? I can't think of many."
Over the past 40 years, Zell has fine-tuned his investment style, which now enables him to see the best opportunities for profit on the planet. He has approx US$1 billion invested in Brazilian companies and he intends to invest more in sectors like the hotel industry and infrastructure.
Thousands of investors, like him, are betting on the potential of the Brazilian real estate market, what is stopping you from joining them?
We at Liquid view ourselves as an investment company that works within the real estate sector as opposed to a real estate sales company. Our approach is to learn about our clients’ goals, timeframes and adversity to risk in order to set a clear investment objective that fits within your parameters rather than ours. Whether you are looking to purchase one unit, ten units or carry out your own project, simply register with us, and one of our highly experienced Investment Consultants will contact you directly.
The Liquid Team - 29 Apr 2010
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