In a recent LinkedIn discussion, I quoted the classic Howard Marks line:

“There’s no asset so good that it can’t be overpriced and become a bad investment, and there are very few assets that are so bad they can’t be under priced and become a good investment

It’s a brilliant line—sharp, insightful, and full of practical wisdom.

But then someone hit me with this:

“Buying cheap in the sales can lead to a lot of tat that you now neither want nor use.”

Obviously, she was referring to bad investments that end up sitting in your balance sheet and sucking up resources without producing a good return. Ouch. A fair point.

Cheap doesn’t always mean value. Real estate is full of traps that look like opportunities—bargains on the surface but financial disasters once you peel back the layers. What might seem like a steal today can quickly become the deal you regret for the next 20 years, particularly in an illiquid asset class like ours.

This kind of response highlights two important concepts that are often misunderstood in real estate. First, “price” isn’t just the headline figure—it’s the total capital employed. Second, value investment is not the same as market momentum. Yes, both might lead to yield compression, but they couldn’t be more different in cause and approach.

Let us start with capital employed: Price is just the starting point in real estate. The real question is: how much capital will you need to invest in capex, maintenance, and repositioning to generate sustainable cash flows? Ignore that, and you’ll soon understand why some assets stay cheap forever.

Take a struggling UK shopping centre and imagine you’re offered the whole thing for £1. Sounds like a bargain, right?

Yet, there could be debt attached, tenants paying rents so low they don’t even cover utilities, and a capex programme that makes your CFO weep. Suddenly, that £1 feels very expensive.

Now change the scenario. The same shopping centre is debt-free and comes with full planning permission for a residential block and a hotel, both pre-leased to a university.

Suddenly, that £1 starts to look like a genuine opportunity— although you’d still want to ask how much capex you’ll need to make it work. The lesson here is simple: total capital employed matters.

Now let’s talk about value vs momentum: I’ve heard countless investors say:

“This is just yield compression, and I don’t invest for yield compression.”

That’s fair, but it shows a misunderstanding of the difference between market momentum and value investing.

Yes, both can result in yield compression, but the cause is very different. Market momentum is driven by herd mentality—everyone piling in and pushing prices higher, regardless of fundamentals (sounds familiar?). Value investing, on the other hand, is about identifying assets where intrinsic value exceeds market value. Yield compression may happen, but it’s a by-product, not the strategy.

The difficult question is, “what is intrinsic value?”. Let’s make a simple definition, it is the expected value of future cashflows (i.e. what you all model when you do an investment).

Now, let’s go back in time and look at two examples that illustrate both points.

The Netherlands was in recession in 2012. GDP growth was negative, house prices were falling, and household debt stood at a staggering 117.9% of GDP. Office vacancies in Amsterdam were over 18%, and Dutch investors wouldn’t touch local assets. Liquidity had evaporated.

The Twin Towers in the Zuidas (South Axis) district allegedly sold at a 6.5% yield. At the time, many investors rolled their eyes. Today, it looks like a bargain.

A value investor back then would have asked a few key questions:

• Is Amsterdam still a critical European centre?

• Will Zuidas remain the city’s main office market?

• Will this building still be an office in 20 years?

• Is the occupier (s) sound?

• Are expected maintenance and capex costs affordable? Is this building competitive in its submarket?

• But the most important question: Does this building HAVE PRICING POWER???

The answers weren’t perfect, but they were good enough to justify the risk—if you believed Amsterdam would still be Amsterdam 20 years from now. And more importantly, would the market reach the same conclusion down the line?

During the same period, a small-town UK shopping mall might have been trading at a juicy 10% yield. But a value investor would have asked:

• Are these rents sustainable?

• 50% of sales are from fashion—is there a growing threat from e-commerce?

• What capex will be required to keep this place competitive?

• And the most important question: Does this building HAVE PRICING POWER???

Now we know that the answer is mostly no – a structural change was going on due to e-commerce.

Fast-forward to today, and CBD offices in European cities face a similar dilemma. Many appear attractively priced, but:

• Is this building still going to be an office in 20 years, or will it become obsolete?

• What capex is required to decarbonise it, and does that work need to be done now?

• Is the competition so superior that this building is unlettable without major upgrades?

• Are rents sustainable for this location and quality level?

• Will this asset be liquid at the price I need to sell it for?

• And the most important question: Does this building HAVE PRICING POWER???

In a way, we are asking one question: Is hybrid working the same as e-commerce? Are offices the new retail? Will liquidity risk for offices escalate like it did for secondary retail?

It’s tempting to say yes. E-commerce reshaped retail faster than anyone expected. Hybrid working might be on a similar trajectory for offices. But there’s one key difference. E-commerce growth was a process. Hybrid work is a one-off shock. Are offices a value investment or a problem? Let’s go back to Howard Marks: “[There are] very few assets [that] are so bad they can’t be underpriced and become a good investment.”

I am tempted to conclude by saying that many offices today could be good investments—at the right price (i.e., capital employed). I have also used the expression ‘pricing power’ several times. And I think this is the fundamental question to ask. In every building. Can this building create tenant tension and therefore have a strong bargaining position to gain pricing power? The real trick is figuring out which ones are tat—and which ones are tomorrow’s bargain, based on a number of principles and well-crafted questions. And that IS what

I understand as value investing.

This article was originally published in the The Property Chronicle Spring 2025