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The value in overvalued properties

By Konrad Putzier

Nearly half of New York’s real estate executives reckon commercial properties here are overvalued, while 31 percent believe an asset bubble is under way and a further 43 percent concede there might be a bubble, according to a survey by accounting firm Marks Paneth.

At the same time, 54 percent still consider New York commercial real estate a worthwhile investment and a mere 4 percent see it as high risk.

Dan Fasulo
Dan Fasulo

In other words: a number of real estate executives apparently think commercial properties in New York are simultaneously overvalued and sound investments. How does that work?

“Those are actually not conflicting thoughts,” explained Dan Fasulo of Real Capital Analytics. “Sound investment usually refers to protecting the principal. Overvalued may mean they believe near to midterm returns may be below historical average because of the run up in values.”

“You can protect your principal while achieving below average returns.”

Another part of the answer, as usual, is globalization. As interest rates around the globe remain low and capital becomes increasingly globalized, foreign buyers have flooded into New York commercial real estate, investing several billions of dollars in 2013 alone.

But unlike domestic buyers, real estate executives say, foreign investors often value capital preservation more than returns. They are often willing to buy overvalued properties and accept miniscule returns if it allows them to buy into stable, high-profile markets like New York City.

These preferences have partially severed the ties between investor behavior and local market fundamentals. In the past, it would have been much harder to argue properties that are overvalued compared to other U.S. cities are sound investments. But nowadays, an overvalued property can be a good investment if we can expect global demand for it to stay strong in the future. займ на карту

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