In my past articles we have covered some interesting property areas including mortgages and finance, buying property, property conveyancing and property insurance. What about contrary investment in property? Will it work like in the stock market where vast fortunes have been made by using this perhaps controversial system? And if we decided to try this unusual form of investment, what paths should we follow? Is there a special secret to it, and how shall we proceed?
This month I will try and provide some interesting tips to follow. Not necessarily easy to achieve or always feasible but at least they will mark a certain path and help a little to make you reach a successful goal in property, not only in Gibraltar, but in other markets as well.
I have always believed that it pays to avoid the crowd. But one must be well aware of what most people are doing and how and when the right moment arrives do the absolute opposite. This may sound unconventional and at times irresponsible but it has paid handsome profits to those who dared and could afford to shift the trend. Following these rules has paid off enormously for years, even centuries in the property market which has – as we are well aware – had booms and downturns where fortunes were made and lost similarly to those in the stock markets, even if property is normally more stable. For this very reason it is of quintessential importance to bear in mind the key contrarian factors and act accordingly. Some of these factors which could lead to sliding property values are:
Increasing interest rates with a very likely to come afterwards credit squeeze or crunch. Higher interest rates mean most developers cannot afford to keep property trading stock as before. If interest rates increase and lending becomes more expensive this will surely lead to a certain reduction or scarcity of buyers. The recession that normally follows a credit squeeze may very well force developers to sell at much lower prices, as it happened in Spain or Ireland in the last decade, way below cost or only just covering the developers cost. This often leads to an increase in office space availability and result in discounted office rents. This happened in Dublin, Madrid, Barcelona and other large European cities which were badly hit during the recession 2008-2014. It resulted in over exposed commercial property developers being completely unable to meet their interest – let alone capital – repayments and finally default. Foreclosure property became the order of the day in major European countries and offered tremendous opportunities to Property Investment Funds from the China, The UK, USA and other major countries to go in when the market was at a rock bottom level and buy up all the prime stock available. The profits made were vast. But not only were the large funds able to do great deals. The clever Contrary Investment Individual investors were there as well and did, and are still doing, remarkably well regardless of their size of investment.
Some key factors which show the ending of a price drive and very possibly the right time to start picking up deals are:
– Housing starts as a low. A downturn in the economy and a recession will force building companies to cut back immediately and supply will be reduced. Demand for housing will take a while to recover but will eventually result in new housing stock on offer leading to an imminent pressure on prices.
– Bad news in the media reporting bankrupt property companies, builders and developers are sadly clear signs that it is the perfect time to start buying and getting some very good deals.
– Estate agents offering great attractive deals: when agents start calling you and suggesting good buys here or there instead of the other way around, it only shows they can be desperate because properties are not selling and they are not doing enough business.
– High vacancy levels in commercial property: if there are lots of offices which are empty and plenty of unsold residential property that is a good sign to start buying up.
The opposite signs should scare the contrary investor away and show the market is topping up:
– Absolute amateurs making vast amounts of money as first time developers. I have seen with my own eyes lawyers, dentists, tax consultants close their former day to day business turning into Property developers (some highly successful I must add) at a time when everyone is doing the same thing. If this is the case pull out as fast as you can because it normally does not last for long. As Sir James Goldsmith used to say “If you see a band wagon it is too late to jump on it…” If it is that easy to make money the bubble is likely to burst sooner than later.
– The Media again telling the world how fantastic the property market is. Booming endlessly. Jump off whilst you can.
– Easy money and easy lending. This reminds me of the USA and Ireland in particular about ten years ago. Banks lending almost to anyone, cheaply and without the normal and much needed due diligence and credit worthiness analysis. The banks will make mistakes, as they did, and start calling in most loans when the going gets tough.
– Low or unusually low availability in office spaces and new flats for sale: If most stock is snapped up by flush buyers paying over the top for their properties then it is probably a clear sign of the market being too hot. Low vacancies in offices do encourage building sprees which can lead to large stocks available for a few years down the road. This was the case in several European cities a decade ago just before the market crashed.
– A very large unusual number of Estate Agents. If you see an estate agent every few shops, and they all seem to be doing rather well then something may go terribly wrong in the near future.
Important points to bear in mind if you have a feeling that a bust is coming soon:
- Buy cheaply in the first place. If a recession hits the market you will still have room to manage till the bad days are over.
- Buy the best you can afford. Always remember location is the only golden rule. Location, Location, Location. In this way values will almost always hold.
- Do not over expose yourself with finance. Make sure the borrowing proportion is as low as feasible. This is a must if a property crash comes.
This article speaks in very general terms and is particularly useful if applied to the property markets of major cities of Europe and across the Atlantic in the USA and Canada. It may be of a lesser relevance in markets like Gibraltar where values seem to hold well due to their quality and lack of large supply. Responsible planning in the case of Gibraltar plays an important role for keeping the market at normal levels.
A last golden rule in the property business is that no matter how bad your mistake may be there is a factor that will play to your advantage and that factor is called time. It will often correct mistakes by its own if you are prepared to wait. Not so I am afraid with most of other businesses.