In the second post of this three-part series we have discussed whether America could be a role model. In this post we explain why Germany has its opportunities and how it should make use of them.
Why Germany has its opportunities and how it should make use of them
Besides the good digital infrastructure Germany has another important advantage: The education system and fostering possibilities. Both fields still need more investments. In addition Germany has well-functioning privacy laws which will gain in importance in the future even more, even though the “demarcation” in the digital, that is, global space will become increasingly more difficult.
These three foundations can help us to solve the arising questions concerning the future shaping of our economic and social order. Economy and social systems can only be transformed together and it needs regulatory support.
Before the transformation the questions regarding systemic challenges and the possibilities to show future approaches through digital models – or at least with their help – arise.
What needs to be done?
In the following 2 exemplary problem areas and possible solution approaches are presented:
Problem area 1: Because of the demographic development in Germany, the segment of the “golden agers” will rise. To a large extent they own real estate that they use themselves but do not have a sufficiently ongoing (pension) income. Another part of society would if necessary even buy real estate, but are hindered by the new residential property credit guideline of the European Union, because the valuation of future income streams will be given a greater weighting as the asset values that are available for collateralization. Because of existing regulations banks will therefore significantly reduce the granting of credits to older home builders regardless of their securities in the future.
Problem area 2: Because of the tense budget situation of municipalities and the state, an increasing number of investments in infrastructure as well as the composition of new supply systems and services with implications on the “social sphere”, will be relocated from public funding to the private sector. “Social Impact Finance” therefore has to – in order to establish itself as a real market segment – withstand market criteria and structures.
Both problem areas have something in common when we look at the restrictions with a certain level of abstraction. These restrictions prevent a sufficient market liquidity and fungibility of assets. But also how we – in the first days of a “sharing economy” – handle the definition and understanding of possession. Especially the question if “brick-investments” could not be structured agilely should be of interest to us.
The problem that needs to be solved for both topics lies in the obtainment of “fungibility” and “market depth” in the relevant asset classes.
In problem area 2 one could come to an effective solution through a structure approach that I also discussed in my article “Alternative Debt – Ein Marktsegment mit Zukunft?” [1]. The certified valuation procedure is complemented by a special “seal” from a third party, which validates the currently applicable criteria on the investment and besides the objectified valuation of the asset (i.e. its cash flows) makes a relevant decision dimension [2] transparently visible to the investor. Thanks to this the decision can be made more objectifiable and in a time wise optimized process.
A central value assessment (certified calculation engine and highest possible transparency standards regarding the underlying assumptions in a structured manner) in the form of a “digital marketplace” is also the basis for fungibility, market depth and a fast (because it is standardized) transaction, which is also a field of the core functionalities of green[::]match.
The solution to problem area 1 can basically be established on the same principles. However, one must distinguish between two sub asset classes: a) the existing structure of (residential) real estate and b) future “utility real estate for the private owner”.
Regarding the existing real estate structure I dare to hypothesize that it will be changed very quickly and fundamentally (not as a whole but in a very substantial and significant market segment) because the current utilization concepts do not correspond to the needs of the coming generation(s) anymore. The (already existing) generation of “digital nomads” do not want regional bindings, even though they do not reject the idea of property on housing. They are used to accessing various resources collaboratively (“sharing economy”) and they put property and possession on a user level, i.e. they do not want to own a car but a needs-based availability of mobility. Additionally they want direct communication possibilities in the community again because they do not only want to share goods but also ideas and beliefs.
Imagine that as a part of your portfolio strategy an investment in a “standard real estate” could be made. In this context standard does not refer to size, location and equipment but to the barrier-free access, the ecological and energy efficient construction method, as well as existing access to resources like leisure activities (from fitness studio to catering) and medical and age-appropriate supply.
The real estate can be rented out as long as you do not want to use it. But it can be seen as an initial investment for the case of personal use at any point in time. If possible and depending on the life situation the estate can then be expanded or reduced in a modular way.
The result of this are “generation houses” which are not based on a generation contract and family bonds, but built upon communication and mobility.
In order to structure this market segment – like in problem area 2 – a central valuation approach in combination with a seal of quality (which tests and validates the rubricated criteria) is necessary. An example for this is a digital marketplace which assures the fungibility of the objects – complemented by an investment savings plan like the ones by German building associations in combination with an operator model which optimizes the local markets and services.
The operator model is also substantial for the solution of the possession/property thinking logic which can nowadays still be observed in every owner’s meeting (of a multi-party house). The operator model can in this case be contractually seen as a management protection screen between owner and possessor.
In order to make the existing real estates “more fungible” an approach that is based on the “reversed mortgage” is needed. The Dresdner Bank did this decades ago, but the market and society were at the time not yet ready for it [3]. Today this approach should be established purely in the private sector and outside the banking industry and thus outside the jurisdiction of the new European guideline for residential property.
This transfer could also be supported by the same digital models / ideas and then naturally be accompanied to the next market phase (utility real estate for the private owner).
Why can I again refer to green[::]match on this topic?
Because green[::]match fits every core element yet to be solved which applies to one of the following frame conditions / criteria and fix it:
The repayment of the investment is based on a cash flow prediction (feed-in remuneration, rental income, availability payments, etc.)
The considered investments do not have to be 100% identical, but the process of valuation and of the transfer of ownership is standardizable
The valuation model is certified and displays the assumptions to all market participants in a transparent way
Additionally – depending on asset class – the investment platform (or put it another way: the “digital marketplace”) can be complemented by “seals of quality” of other consideration and investment dimensions, if they as well fulfill the criteria concerning transparency and objectivized representation method.
If these criteria are met, the basis of a “digital market model” and thus the core of a “sharing economy” is provided.
This means that green[::]match contributes an important idea component to the question of society of the future. The coming years will not only occupy us with various fundamental questions but also demand solutions which help to solve old problems. One could call the next years “the age of consequence”, because we will be unalterably confronted with many effects of the last years. The approach of green[::]match can be the key to making these problems more solvable in the future. In other words: I believe in certain aspects of the analysis of the “four horsemen” [4] – but also in the fact that we can change many more things if we focus our thinking.
Reactions, comments and suggestions to this article are welcome: zenke@strategy-and-finance.de.
[1] See also https://www.greenmatch.ch/de/blog/alternative-debt (only available in German)
[2] Such decision dimensions – besides the economic basic conditions – are e.g. the effects on resources, environment and social structures, which means “social impact” in a broader sense.
[3] The loan payment was made in the form of a retirement, but on a value below the loan value. The “non-success” of this concept was due to the deductions below the loan value, which made it unattractive for house owners and due to the not strategically thought-out offer as a transformation aid vs. a pure financing offer.
[4] Four Horsemen is a British documentary of 2012 by Ross Ashcroft. The Movie criticises the system of the fractional bank reserves, the economy ideology which is based upon debt and the political influence of banks which is seen as a profound danger to our western civilization. As an alternative the movie presents a return to traditional economics, which e.g. builds upon the gold standard. Amongst the interviewed people are Joseph Stiglitz, former chief economist of the World Bank; Noam Chomsky, Professor of Linguistics; John Perkins, Author of “Confessions of an Economic Hit Man; Herman Daly, Professor of Economics and former economist at World Bank.
Author
Harald Zenke, Owner of Strategy & Finance Advisory Strategy & Finance Advisory is an owner-managed consulting company which sees itself as a developer and implementation guide of product and process innovations as well as new business models in the financial services sector. Harald Zenke has more than 15 years of experience in the field of renewable energies and project finance, amongst others as CEO of KfW IPEX bank and EVP Corporate Finance of LBBW. www.strategy-and-finance.de
