Having The Confidence – When Others Do Not

I often have discussions with investors about where the “next place” to invest is and why we are investing and consulting in the areas in which we do. This conversation becomes all the more interesting when you talk to locals, either investors in the area or just folks that have followed market conditions for a good while, and understand the local market. At least from a historical perspective. The conversations often lead to points about timing to enter a market, and the confidence there is generally in place. Comments like:

“if it is such a good place to invest, why isn’t everyone buying there?”

“I would not invest in my home town, prices just keep going down..”

“Its got to be cheap there for a reason”

And so on.

These are conversations I like to have. Only by exchanging ideas with investors, and really challenging our ideas about different markets can we really find out what we are looking for. The “gold” for us is high yield property with high levels of investor finance in place. Or to put it another way, a market where investor confidence is generally low or very low and the confidence of lending banks is high. A VERY ODD SITUATION THEN!! Let me explain more what I mean.

In the 3rd Edition of the “Your Life in Property” book in Chapter 10, we played with the concept of the fire triangle and how this can represent market conditions for property. With the fire triangle below, the idea is that for a fire to start and take hold, the 3 elements around the fire need to be in place. Take one away, and the fire cannot start or is extinguished. A useful little idea perhaps.

In the context of property, we can transpose to give:

I shall leave the discussions for now to the bottom element, the “fuel” or investor confidence. We discuss yield reward and financing fully in the book, if you would like to read up on these parts [which together give the capital gain “fire”].

Fuel OR Investor Confidence – How much is needed?

From the book, we can think here about the conditions which put the investor confidence “fuel” in place. Conditions typical for this are:

• Recent capital gains, which are well-published in the media in the later stages

• Economic improvements, unemployment falling or wage rises

• Increasing population, often characterised by rising rent levels after a time

• Investor successes in other markets, and looking to replicate their success

A sure sign that investor confidence is in place can be when conducting property viewings. In extreme cases, you could be joining a line of ready buyers all looking around the same property. And the auction houses are either empty of stock, or auctions are being used to bid buyers up well above usual levels. Estate agents in this period get lazy, and often don’t call you back. That sort of thing. Not really a market to get too excited about, I would say, prices and yields rarely work when investors and local buyers have confidence to invest in great numbers.

Ok, but what does a market that lacks confidence look like?

• The estate agents all call back, and mail you with useful updates [an odd situation!]

• You feel you are almost alone in the market. Property can be on the market for a long time, and viewings are all done with you alone [not a coach load of investors].

• Prices are either declining or are static [and may have been static for a long time].

• Most locals, not connected with the industry, warn against buying and tell of bad times behind them.

• Even estate agents themselves warn against investing in anything other than “prime” property. They know well the price falls in recent times.

• There is little or nothing in local or international media about the area being of interest for investment.

I guess it is not too hard too find markets that meet all the conditions listed above, there are lots about at the moment, and they could well be lousy markets. Investor confidence is perhaps well placed. But, and most interesting, what does a market that lacks investor confidence BUT could well be a great place to invest look like?

This, I think, is what all yield investors are seeking. Me included. Some ideas would be:

• Population is increasing or at least static.

• If population of a whole city is on the decline, perhaps a suburb actually enjoys population growth, and is in high demand. General low investor confidence would then be mis-placed in this suburb.

• Property prices are broadly static, or have been gently increasing for in the recent past.

• Rental yields are high, perhaps 2-3 times the interest rate of investor finance.

• Properties in average locations find tenants without too much difficulty, and rental prices are static or increasing slightly.

• Bidding for property [at a reasonable bid level] is easy and you do not face too much competition.

• Finance is in place for owner-occupiers to a reasonable level, and perhaps investor finance is in place.

The above really is a list of things we search for as investors within any market in which we participate. In sum:

We do not seek the re-assurance of the confidence of the general investor or owner-occupier, as we realise that waiting for this will generally mean that prices have risen to a good extent already. Rather, we look for the fundamental indicators that mean investor confidence is perhaps just around the corner, and then invest as heavily as we are able.

So it can be a lonely path, but one of good reward. But the real “gold” is finding markets where all the conditions are in place, and investor finance is available at good rates and leverage [loan to value] limits. This means that the financing banks share your hunch that the area is a good bet, even if your fellow investors do not. THAT IS WHERE TO HEAD!!

So Mat, where are these conditions today??

These markets are really like the proverbial “needle in a haystack” to find. As a fellow investor, I will share 3 cities where it all stacks up: Leipzig, Chemnitz and Bremerhaven in Germany. No surprise you might say, as that’s where ProVenture works! Well, for all the reasons above, that is why we are there. Outside of our usual areas in Germany, we offer the tip that the industrial heartland of the Rhine-Ruhr region of Germany offers surprising value, and maybe a place to seek out.

And for those who can sacrifice the need for investor finance to be in place, perhaps Orlando and Tampa in Florida are worth looking, sticking to areas which deliver sustainable yields. Finally, an “odd-ball” tip is actually in the UK, Edinburgh the capital city of Scotland. It is rare to find a European capital with such strong fundamentals to lack investor confidence. You could say, due to the financial uncertainties today, confidence [and therefore prices] are at a low ebb in the city. Backed by a unique rental sector, certain parts of this city demand some attention in 2012. It certainly has my attention right now…

We really welcome ideas you have for areas around the world which you think fit the “low investor confidence / high bank confidence” model. Feel free to email us [and we can include on the next newsletter with your permission], or comment on our Twitter or Facebook feeds.

Good luck in the hunt.