“How much intuition
can a business case tolerate?”

Daniel Bauer in conversation
with Nils Hübener

Daniel Bauer: From tomor­row, neither Excel nor Power­Point will work. What percent­age of the prop­er­ty sector would be paral­ysed at first? What would you person­al­ly miss the most?

Nils Hüben­er: That would be quite a blow … I reck­on a surpris­ing number of people would be rather at a loss at first. Not neces­sar­i­ly because they don’t under­stand prop­er­ty, but because deci­sions these days are heav­i­ly under­pinned by models and compar­a­tive figures. I’d miss the abil­i­ty to quick­ly discuss complex issues more than I’d miss Excel itself. Ulti­mate­ly, you have to be able to answer the crucial ques­tion even with­out a model. What, actu­al­ly, is the invest­ment ratio­nale here?

When was the last time you had to make an impor­tant deci­sion where your gut feel­ing told you some­thing differ­ent from the figures, and who did you end up trusting?

When it comes to prop­er­ty invest­ments, for me, gut feel­ing isn’t a counter-model to the figures, but rather a sort of early-warn­ing system. If a busi­ness case looks excel­lent on paper but some­thing feels off about the loca­tion or the oper­a­tor, you know instinc­tive­ly where you need to dig deep­er. The crucial ques­tion then isn’t ‘gut feel­ing or the figures?’, but: Which assump­tion in the Excel spread­sheet explains my sense of unease?
And, above all, beyond the figures: prop­er­ty is so excit­ing precise­ly because it’s so wonder­ful­ly complex … Ulti­mate­ly, both sides have to fit together.

What do you think is more danger­ous: a bad deci­sion or a good deci­sion that comes three months too late?

In prop­er­ty, a good deci­sion that comes three months too late is often more danger­ous than you might think. An invest­ment doesn’t have to be perfect, but it must be suffi­cient­ly well under­stood and feasi­ble at the right time. What use is a busi­ness case with 95 per cent certain­ty to me if the prop­er­ty has already been “snapped up” by some­one else? Bad deci­sions aren’t great either, of course.

Unfor­tu­nate­ly, there have been. Such deci­sions are often more instruc­tive than clear-cut success­es. Above all, I’ve learnt that a model can never be better than the assump­tions on which it is based, and that you have to distin­guish between model risk and market risk. That’s why, when look­ing at a busi­ness case, I’m at least as inter­est­ed in which assump­tions would have to be wrong for the logic to no longer hold. And once again on the subject of complex­i­ty: prop­er­ty is a social asset and must func­tion sustain­ably for its users … that can’t be expressed in figures alone.

And converse­ly: was there ever a situ­a­tion where many people said, ‘That won’t work’, but you still thought, ‘Yes, let’s do it’?

Yes, some­times the differ­ence lay in the fact that others were look­ing at the current state of affairs, whilst I was focus­ing on the poten­tial state or the future devel­op­ment of the site. Perhaps the ques­tion is rather: is the risk real­ly that bad, or has it simply not been addressed suffi­cient­ly yet? Or is the perspec­tive perhaps wrong or too narrow?

How can you tell rela­tive­ly quick­ly these days that some­one is hiding behind analy­ses because they actu­al­ly don’t want to make a decision?

When two new analy­ses are demand­ed for every ques­tion answered, and the deci­sion still doesn’t change, that’s when things get inter­est­ing. At some point, addi­tion­al infor­ma­tion is no longer a means of reduc­ing risk, but an expres­sion of fear of making a deci­sion. If you cannot make a deci­sion when you have 85 per cent of the infor­ma­tion, you’ll prob­a­bly still be asking for an Excel spread­sheet show­ing 120 per cent even when you have 95 per cent. Here, it’s impor­tant to think in terms of robust­ness and oppor­tu­ni­ties and to give suffi­cient consid­er­a­tion to the funda­men­tal basis of the investments.

The Invest­ment Commit­tee has ten minutes left and is allowed to ask exact­ly three ques­tions. Which three must be answered before you give the green light?

First­ly: What is our invest­ment thesis – in one sentence? Second­ly: Which two or three assump­tions must hold true for us to achieve our return target, and how robust are these assump­tions? Third­ly: What could real­ly cost us money in the long term, and can we influ­ence this risk, or can we only passive­ly hope that it does not materialise?
Fourth­ly 🙂 (I’m afraid this has to be includ­ed): Are the funda­men­tals convinc­ing (sustain­able rent, (ener­gy) effi­cien­cy, replace­ment costs, etc.)? If these ques­tions cannot be answered clear­ly, even the thick invest­ment memo­ran­dum is of limit­ed help to me.

In your opin­ion, which key figure receives too much atten­tion in prop­er­ty deci­sions, and which too little?

In my view, the IRR often receives more atten­tion than is actu­al­ly help­ful, because it looks precise, even though it is based on many uncer­tain assump­tions. On the other hand, too little atten­tion is paid to the qual­i­ty and resilience of the cash flow – in other words, the ques­tion of where the money actu­al­ly comes from and how robust this cash flow is in poor­er market condi­tions. I’d rather invest in a slight­ly less spec­tac­u­lar IRR with a resilient cash flow than the other way round. And here, too, the funda­men­tals matter: how easi­ly can produc­tion take place in the market in ques­tion? Can I expect short­ages? Am I sustain­ably competitive?

What makes you more suspi­cious these days: a poor busi­ness case or one that looks aston­ish­ing­ly perfect?

Quite clear­ly, a busi­ness case that looks too perfect. Prop­er­ty markets are complex. If, in a model, exit yield, rental growth, vacan­cy rates, capex and financ­ing all appear opti­mal at the same time, a few warn­ing lights should come on. A good busi­ness case is allowed to have weak­ness­es. The crucial thing is that you are aware of them and active­ly address them.

What, in your view, distin­guish­es a good idea from an actu­al­ly investable idea, and why do even good ideas so often fail at the imple­men­ta­tion stage?

A good idea may initial­ly describe noth­ing more than a possi­ble, poten­tial value. An investable idea takes into account how, when and through what means this value can actu­al­ly be realised. In prop­er­ty invest­ments, there­fore, fail­ure often stems not from the idea itself, but rather from plan­ning permis­sion, the speed of imple­men­ta­tion or even the courage to make deci­sions. For me, investa­bil­i­ty begins when a story is trans­formed into a robust plan with clear­ly defined respon­si­bil­i­ties and real­is­tic assumptions.

As a member of the advi­so­ry board, you know Valdivia well enough to truly under­stand our issues, yet you have the neces­sary distance from day-to-day oper­a­tions. What can some­times be seen more clear­ly from the outside than from the inside?

From the outside, it is some­times easi­er to see which issues are truly strate­gic and which mere­ly appear urgent. In day-to-day oper­a­tions, one natu­ral­ly focus­es on today’s prob­lems. I hope that, as an advi­so­ry board, we can ask more frequent­ly whether the compa­ny is actu­al­ly solv­ing the right prob­lem (for its customers).

When does a good advi­so­ry board need to become a thorn in the side, and how does a compa­ny know that the advi­so­ry board is actu­al­ly making a differ­ence and not just sitting around the table four times a year?

An advi­so­ry board must start to be a thorn in the side at the very latest when every­one in the room is of the same opin­ion – espe­cial­ly if that opin­ion has perhaps become too comfort­able. Its value becomes appar­ent in the medi­um term by whether better deci­sions are made follow­ing a meet­ing. A good advi­so­ry board should there­fore not only moni­tor, but also pinpoint precise­ly the assump­tion that nobody ques­tions anymore.

If you were allowed to ask us at Valdivia just one ques­tion – one that we prob­a­bly ask ourselves far too rarely – what would it be? What would it be?

‘What would we do differ­ent­ly today if we could build Valdivia from scratch all over again?’ And after that, we can ask ourselves the follow-up ques­tion togeth­er: why aren’t we actu­al­ly doing these things today? Some­times success­ful compa­nies are more bound by posi­tive results than by their strategy.

And if you had to rein us in on one point and say on anoth­er: “Less analy­sis. Just do it.” Which two areas would those be?

Perhaps in line with the thoughts on invest­ment deci­sions we discussed earli­er: we should be more cautious about anything based on ever-finer market analy­ses, even though the key uncer­tain­ty might not be resolv­able with suppos­ed­ly more accu­rate data.
I’d say “just do it” in situ­a­tions where the hypoth­e­sis and the ratio­nale are already clear, and further analy­sis would only delay the deci­sion even further.

When we look back at today’s prop­er­ty sector in 2035, what will we be surprised by and say: “Unbe­liev­able that we still did it that way back then”? What will we be surprised by and say: ‘Unbe­liev­able that we still did it that way back then!’?

We’ll prob­a­bly be surprised at how much time we still spend today compil­ing data from vari­ous systems, check­ing its valid­i­ty and then trans­fer­ring it back into presen­ta­tions. We’ll also wonder why we so often relied on aver­age figures when making invest­ment deci­sions, even though prop­er­ty is extreme­ly local and property-specific.

“If you could give your 30-year-old self just one piece of advice on deci­sion-making, what would it be?”

“Don’t wait for absolute certain­ty … Have the courage to make a deci­sion when you know enough to be able to bear the conse­quences of that decision.”

About Nils Hübener:

With over 25 years’ expe­ri­ence in every aspect of the real estate indus­try, Nils Hüben­er is one of the most promi­nent figures in Euro­pean invest­ment and asset management.

He gained inter­na­tion­al expe­ri­ence at an early stage of his career at IBI Real Estate in Berlin, London and Paris, before join­ing Deutsche Bank Real Estate as Head of Trans­ac­tions for West­ern and South­ern Europe. He then held long-stand­ing pan-Euro­pean key posi­tions at SEB Asset Manage­ment as Head of Real Estate Manage­ment and at BNP Paribas REIM as Glob­al Chief Invest­ment Offi­cer. He then served as CIO, respon­si­ble for Euro­pean invest­ment and asset manage­ment, at Corestate Capi­tal in Luxem­bourg. Most recent­ly, as Chief Exec­u­tive Offi­cer of the Dr. Peters Group, he over­saw the company’s strate­gic realign­ment and expan­sion. He is current­ly support­ing Noratis AG in its ongo­ing restruc­tur­ing as a non-exec­u­tive CIO, while also advis­ing inter­na­tion­al investors on their activ­i­ties in Germany.

He obtained a degree in urban and region­al plan­ning from the Tech­ni­cal Univer­si­ty of Berlin and Oxford Brookes Univer­si­ty, and a master’s degree in Euro­pean Prop­er­ty Devel­op­ment & Plan­ning from the renowned Univer­si­ty College London.

His exper­tise covers the entire insti­tu­tion­al real estate invest­ment value chain – from acquir­ing and struc­tur­ing complex trans­ac­tions to manag­ing assets and port­fo­lios inter­na­tion­al­ly. His multi­lin­gual­ism strength­ens his endeav­our to build bridges between markets, cultures and investors. In addi­tion to German, he is fluent in English and French.

(Image source: Busi­ness & Commer­cial Photog­ra­ph­er Sebas­t­ian Schueler, )