Berkshire Hathaway Vice Chairman Charlie Munger isn’t the only one raising warnings about investing in commercial real estate. Robert Cote, a prominent intellectual property lawyer and the founder and CEO of Cote Capital, shares Munger’s concern but is going one step further by recommending that investors consider “putting their money in a new kind of property that is not fixed in one location or limited in its cashflows like real property, nor stuck when there is an economic downturn.”
For Cote, the property that should be in the crosshairs of investors is intellectual property (IP) – specifically, the designs, manufacturing equipment and know-how behind the creation of innovative products. Weekly Real Estate News spoke with Cote to learn why he is advocating for this type of investment.
What is the advantage of investing in IP versus physical property?
Real property – physical real estate – has struggled with the ups and downs of the economy – and we see that now with valuations and the impact of high interest rates. When you think about real property, it’s fixed in one place – it’s a building, a multi-unit apartment, and cash flows. As an investor, that’s traditionally been the way that you invest in property.
With an IP property, what I’m talking about are new ventures that have breakthrough innovations. that changed the game in some way within an industry. And those kinds of ventures are based on years of deep science and engineering – people call it “deep tech” and what that means is when they come the market, they have a property and asset base called IP property that is a new design for a product or game-changing manufacturing equipment for how to make that product.
When you invest in that property, it can be shared or licensed around the world, just like McDonald’s or Starbucks can be replicated around the world. An IP property is something that can create value wherever it goes, and it is not fixed in one place. And it has cash flows wherever it creates that value, just like a piece of real property from its use. The investment is secured by the value of that property. You want to be in something that has unlimited or infinite potential, not something that has fixed potential.
Are you seeing people following this advice and moving away from real property to IP property?
I’m leading a mission to drive venture capital back to its roots, which is building physical products based on breakthrough innovations. That’s how the country became prosperous. And following the internet boom, it became kind of a dirty word to say you were manufacturing something – that was moved offshore to low-cost labor markets because we weren’t innovating in that space like we once had. In order to be profitable, they had a move to where they could bring labor costs down.
And, so, it became very much in vogue to digitize the world as a way to grow the economy. We moved from kind of making physical things to making digital software and apps while putting businesses online. While it has a tremendous value for everybody – it makes business more efficient, it connects the world, you have greater customer base – what we’re seeing is a shift back from software to hardware, or to making physical things again. A lot of that’s been driven by sustainable development goals that the public and the governments are pushing. It is in that area are where a lot of the breakthrough innovation has been happening.
But where does that leave the real estate sector, if there’s going to be a migration away from that type of investment into what you’re advocating? Isn’t that going to make a bad situation worse?
I think that real property investing will continue to play a role. We need physical property to live, to house ourselves to have office space. So real property investment doesn’t disappear.
Real property investment is like investing in a commodity. Many people can do it, yet it’s hard to be competitive in that game and therefore it becomes challenging to make real money in that game.
But if you go over to IP property, you’re going to see more and more alternative investments and education for financial advisors to their customers, and a shifting from real property over to companies with breakthrough innovations.
We should realize the real property doesn’t provide us with the same economic impact for our country or the world, and it doesn’t provide us with the same returns. It’s correlated to the economy, and we go through these cycles of suffering ups and downs.
IP property doesn’t replace real property. It just becomes a place where people can get better returns and have an impact.