2005: Why doesn't Berkshire invest in real estate?

AUDIENCE MEMBER: Hello. My name is Hamid Rezapour. I’m from Orinda, California. I had a question about real estate.

And I know this question was asked in previous shareholder meetings about, “How come Berkshire doesn’t invest in real estate?” And I believe the answer was that, “We like operating business.” So I want to make my question a little bit more specific towards commercial real estate.

So, considering the characteristics of larger-size commercial real estate investments like REITs that can have the behavior and financial returns of an operating business, why not invest in real estate?

Is it because you just don’t like the returns? Or the business is just not attractive?

WARREN BUFFETT: Yeah, well, Charlie got his start in real estate. Right, Charlie?

CHARLIE MUNGER: Yeah. I would say, number one, that in a corporation like Berkshire, that’s taxable under subchapter C of the Internal Revenue Code, owning real estate is grossly disadvantaged compared to owning it directly by individuals such as yourself. That’s number one.

And number two, real estate — investment real estate — is having bubble valuation problems of its own right now.

All my rich friends who own real estate are selling their worst properties. And they’re getting bids that come in higher than their highest expectations. And people are competing to take these things off their hands.

I do not find it exciting. And it certainly doesn’t fit Berkshire. Name me a lot of C corporations that have been passive holders in real estate and have done well over a whole lot of years. It’s almost a null class.

WARREN BUFFETT: Yeah, Charlie and I — I mean, both — more Charlie than I — we’ve had certain personal real estate investments over time. And it — you know, it’s a field that, in general, we understand.

We don’t bring that much special to the game, but we understand it. We’ve made money in it.

And actually, at the time that the NASDAQ about hit its high, REITs were quite cheap in my view. And I have less than 1 percent of my net worth outside of Berkshire, but basically I had that portion all in REITs. They were all small ones at that time.

And — but they were selling at discounts. At that time they were selling at discounts to the values of properties. And those values of properties were much more conservatively figured than today.

Today, you have very fancy prices on real estate. And on top of that, you have the REITs often selling at a premium, though. So, I regard REITs as quite unattractive now, certainly compared to five or six years ago. But that’s a group of —

CHARLIE MUNGER: That’s for an individual, you regard them as unattractive?

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: And for a corporation, that much more so?

WARREN BUFFETT: Yeah, right. Right. It — the situation changed dramatically from five or six years ago. I mean, the stock market, in many respects, from the 1999-2000 period, is down significantly. REITs are up significantly.

REITs were very unpopular five or six years ago. Now they’re popular.

It’s better to pay attention to something that is being scorned than something that’s being championed. And there’s really been a big change in the REIT situation in the last five or six years.

CHARLIE MUNGER: And the REITs have phony accounting.

WARREN BUFFETT: Otherwise, we love them.

CHARLIE MUNGER: Yeah. (Laughter)

WARREN BUFFETT: You don’t want to bring up anything in these meetings. (Laughter)