Making money in any market

Tuesday, May 19, 2009

Making money in any market

Property markets, like all other others, go up and down. But savvy investors know that there are ways to make money in all types of conditions. Here Ready2invest's Jonty Crossick offers some key buying principles.


1. Back to Basics
There are about 195 countries in the world, give or take a couple of disputed territories. From a property point of view, these countries are either mature, emerged, emerging or unstable. The world is more accessible now so when one market slows, there is always something interesting about to happen somewhere else. So its worth keeping up to date with any changes in the vital statistics of countries around the globe.

Some quick research into Gross Domestic Product (GDP) growth, inflation history, employment figures and foreign direct investment (FDI) flow will give a well-rounded view of potential hotspots before you invest. Then, if you like what you see, dig deeper and investigate the countrys property ownership laws, taxes and other factors that add hidden costs to property purchases. It might sound boring and time-consuming when all you want to think about is the excitement of short-term capital growth prospects, but research like this will underpin your investment decisions and give you the confidence you need to succeed. It will also mean that while others complain about tougher conditions you will have gained a head start by looking at new opportunities.

2. Track trends

With the media so focused on bad economic news and the credit crunch, youd be mad to invest in property now, right? Wrong.

Savvy investors know that good value holds true whatever the market conditions there are still plenty of solid investment opportunities out there. As billionaire American investor Warren Buffett says, Be fearful when others are greedy, and be greedy when others are fearful.

Motivated sellers are even more keen to sell in a market thats plummeting, right? You just have to make sure that the motivated seller isnt you. By tracking whether a property market is on the way up or down you have more chance of making an informed investment decision. Unfortunately, theres no mathematical formula that will reveal when the market is at its lowest or how to know when a market has peaked.

Judging when a market will hit the bottom is both an art and a science. It is as much judgement as statistical analysis. It is always helpful to observe not just falling prices in a bear market but whether the fall is accelerating or decelerating.

3. Cycles are key

When you invest in property there are two interdependent cycles that you need to assess and judge. The first is the economic cycle and the second is the property cycle. Educate yourself about these and observe how they interact and your investment decisions will improve.

The economic cycle is important because it impacts on things like the number of people with jobs, the increase in wages and salaries and access to credit. These factors directly affect the demand for property.

The property cycle feeds off the economic cycle but can then take on a life of its own. This is because supply can be slow to respond to the reality of demand which, fitfully, leads to oversupply during some periods and undersupply at others. Also real demand can be spiked by speculative demand as investors rush in, hoping for returns tomorrow.

This is why the property cycle does not always mirror the economic cycle exactly. Keeping an eye on these two cycles in foreign countries can give you the edge when it comes to new investment opportunities.

4. Major reforms = opportunity

Safe and established destinations like Portugal and France are a must if youre a low-risk investor. They wont offer huge returns but certain properties such as frontline or prime golf-course residences will hold their value and sustain their demand for years to come.

But its the more unpredictable countries that offer the best potential for higher returns and there are triggers that can help to accelerate growth and reduce risk. We all know the effects that EU accession can have on a country so were all looking for opportunities in countries that are set to join the EU or to adopt the Euro. But beyond that there are a number of changes that can affect the potential investment climate in any country.

The World Bank has an excellent tool on its website called Governance Matters. Here you can search through 212 countries and territories and see their progress on key indicators such as accountability and political reform. The information here is priceless, and you might even find yourself considering places like Libya and Oman, countries you never would have looked at 10 years ago.

For example, if you can see a sharp increase in the rule of law in a country this is a sure sign that foreign direct investment will start pouring in. This in turn can spark a lot of economic activity and property opportunities.

5. Buy below market value

If theres one essential piece of advice it is this one. Buying at under market value is a key principle behind any good investment. And in any market, especially a slowing one, purchasing a property below market value has intrinsic benefits. If local prices slow, stagnate or even fall, you can still make money as your investment comes with the safety margin of having a built-in profit from the start. It also makes your property easier to sell.

If the market does not fall much then, with capital growth immediately factored into your purchase, you dont need to achieve the highest price to make a decent profit. This eases the sale. Thanks to the Internet it is now fairly simple to judge whether a propertys price is genuinely beneath market value. By searching websites for similar properties with comparable dimensions, views and in your chosen location, you can compare prices per square metre and be confident in your discount.

Another investor tool, leveraging, also comes into play here. Although typically connected to final profits, its effects can also be felt with rental yields. An under-market-value property will receive the same rental income as a similar property belonging to someone who paid full price, making your rental yield higher. Handy.

Always buy at under the market value because even the most seasoned experts never know exactly where the top and the bottom of the market is.

6. Recycling demand

High demand means growing house prices so if you can predict where demand might rise you will be able to capitalise on this lucrative price driver Bad economic news in one part of the world can often mean good news elsewhere. For example, the UK is currently being hit by tighter credit and higher energy and commodity prices, so look for places in the world where property prices will benefit from this recycling of demand.

Brazil's discovery of massive oil and gas reserves in several offshore fields could turn it into the third largest oil-producing nation in the world. The find will undoubtedly boost the countrys wealth and investment potential but on a smaller scale it is likely that a massive influx of workers will move to the area to mine the fields. And all of these workers will of course need housing.

Closer to home, Albania is another country that has also recently discovered oil. The country is already receiving millions of EU assistance to improve its infrastructure and, if proved, these reserves will fast-track the countrys integration into the EU.

7. Be emotionally aware

We might not like to admit it but everyone is motivated by two things greed and fear, and both can affect our judgement when it comes to making sound investment decisions.

This isnt to say that emotions are a bad thing, but we just need to be aware of their effects. Greed makes us invest in silly things so when we fail we often cant understand what went wrong. Fear stops us from jumping even when an investment is sound.

The key is to stay calm. Look at things objectively. If something is making you wary about a deal, pinpoint what that is. You might not ever resolve what is making you uncomfortable but at least by acknowledging it, you will be making an investment decision based on the whole picture.

Its a much observed but little acknowledged fact that property markets reflect human behaviour, and therefore emotions. If you look at the UK market, the recent boom has been driven by investors wanting to make money and buyers not wanting to get left behind, and the banks have helped fuel it by supplying the ready cash. Now were seeing a correction back to more realistic prices, which is being exacerbated by people who are too afraid to buy now in case the market continues to fall.

The more aware you are of your emotions and the less you allow yourself to be driven by exuberance or paranoia around you, the more successful you will be.

8. Add value

When markets get tough investors need to be creative, and value can be added to property in many ways. The most obvious (and popular) way is a quick paint job, but you could also increase your return by simply employing new rental agents and improving your yields.

Alternatively you could consider changing the usage of a building. Altering the layout to create a new room or by dividing a house into flats can be a costly renovation but it can be money well spent. Other ways to add significant value to land or property can be generated by adding planning permissions to a property. Anything that makes an investment less risky or adds potential to a purchase will buoy your asking price.

9. Find your niche

Simply identifying a hotspot isnt the end of your investment journey. Property markets dont move in a wholly uniform manner, so pinpointing the properties and areas that will hold their demand can make all the difference in your final returns.

Cities are a good example of this as they are divided into boroughs and municipalities, each with a unique character and style, meaning local research is imperative for differentiating the problem neighbourhoods from the up-and-coming ones.

Look for triggers that might be driving a market such as transport links, infrastructure, affordability and industry. If improvements are being made to an area could this mean that more families might be looking to relocate there? Families need larger houses so bear this in mind when buying.

10. Be realistic

Remember, the cardinal rule of investing is to always remain in control of when you sell. The lure of making large gains can blind buyers into overstretching their finances, believing that the risk will be outweighed by the returns. But no one can ever read the future and by investing within your budget you will be able to ride out fluctuations, even if that takes several years.

Ensuring you can pay your mortgages safeguards you against becoming a motivated seller. Anyone forced to sell because they cannot afford to hold out faces settling for a lower price than a property is worth, potentially losing money on their investment, or in the worst case, facing repossession. Markets do recover just make sure you can wait long enough for that to happen.

Visit www.ready2invest.co.uk for a selection of investment opportunities.

A Place in the Sun magazine issue 64 front cover

This article was published in the March 2009 issue of A Place in the Sun magazine. To order a back issue call +44 (0) 20 3207 2920 or to subscribe click here.

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