Over the years, the growth in popularity of the property market reflects its consistency as a store of value. The value of an asset is only worth what a buyer is willing and able to pay for it. An asset doesn’t necessarily appreciate; it can remain static or depreciate. Since investment is about becoming better off, whether to invest and what to invest in requires a leap of faith. Since faith is to do with belief and confidence, the way to boost and maintain confidence to a level that is capable of supporting sufficient demand needed to create a viable market for the particular asset is for vested interests to indoctrinate by encouraging people with money that the risk will be rewarded.
A vested interest reckons that if enough people could be convinced of the merit of the asset then demand would exceed supply and result in an increase in value. In property, indoctrination is through education and propaganda. From learning ‘ins-and-outs’ to examples of how well others have done. For authenticity of transaction, transparency is supported. To fuel demand, banks lend on borrower income and/or revenue from the asset. For how to gauge the market price without selling, values are based on opinions of surveyors.
Nowadays, a great deal is riding on the continuity of that conviction. The number of vested interests has risen. From Government policy for the economy and taxation, to banks as a ready source of profit, to property industry advisers, the art of propping up the property market to ensure that even if it were to collapse then it would bounce back without much damage to the vested interests is big business.
Vested interests are persons and corporate bodies that have had property interests since time immemorial and/or bought when property investment wasn’t accessible to all. Long-established investors rarely sell: when prices rise, they remortage the equity and buy more property. Previously, prices rose from ironing-out problems and technical valuation. Nowadays, those reasons have been joined by the hot-air brigade: supply shortage caused by relatively inexperienced investors on a demand momentum, and yield compression caused by low interest rates.
An attraction of property for investment is that tenant payment of rent is a legally binding contract. Since leases for commercial property often last for years, rental income provides a more stable return on capital than the instability of dividends from equities, or corporate bonds where unsustainable indebtedness from falling revenues and rising costs means bonds have become more risky, spreads widening, prices falling.
Recent reports indicating that institutional investors are escaping the volatility of the stock market and instead buying long-dated illiquid assets, of which real estate (property) is the most likely, is worrying, especially for private investors. Institutional investors focus on prime commercial property, thereby limiting asset selection to about 10%-20% of the market. Since prime commercial property is rarely sold, the purchase price reflects scarcity so the yield is low. The need for cash to pay out to pensioners and ilk means that a great deal rests upon prime property performance. Prime property rental performance is driven by demand from the calibre of tenant whose operational indebtedness is mostly of the type whose equity and bonds the stock market is comprised. By coming out of the stock market and going into property, all that the institutional investor is doing is becoming landlord to the sort of companies whose shares and bonds the institutions are shying away from.
The same principle applies to private investors, whether or not they also invest in the stock market, except that the private investor has to be content with the non-prime property market. Since the property investor owns the building, not the tenant business, the tenant business plan is bound to affect demand for property and rub off adversely on market rent in lesser locations.
An advantage of illiquid assets is the absence of pricing data. Because each property is not regularly traded, investor losses are not known or disclosed until the investment is revalued which could be years later, by which time the true reason for the loss can be hidden by referring to events over which the investor had no control. When push comes to shove, fund managers are good at finding plausible reasons to keep investors waiting for their money.
The best time to buy property is when there is no money about, because then prices offer good value. The worst time is when market momentum has inflated prices to a level that bears little or no relationship to the underlying value of the asset. But, because the market is based on hot air, no one really knows the underlying value of the asset: the only people whose opinions are respected by the media are those with a vested interest.
Participation without questioning the assumptions upon the market is based is risky. For long-term buy and hold, past performance suggests that numerous downturns along the way are more than offset by inflationary upturns caused, in more recent times, by artificial stimulants, such as political initiatives and quantative easing, and yield compression. But there comes a time when the permutations for creative accounting dry up, at which point the truth will out.
The property market comprises sectors and sub-sectors: residential, retail, industrial, commercial, agricultural, etc. Riding the cycle of a sector without coming unstuck in times of change requires understanding of what makes that particular sector tick. For shorter-term success, trading property, the challenge is to sell before it becomes obvious to the masses that the price bubble is about to burst. For longer-term success, to remember that the purpose of downturn and recession is to weed out the weak so whether the property would perform were it not for interference with the forces at work. Property is a long-term investment which is only another way of saying that long-term forward-thinking is crucial for success.
The Rent Review Specialist