Is it time to consider a contrarian investment strategy?

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Everything comes to those who wait!We have set up an interesting thread entitled “Is it time to consider a contrarian investment strategy?” at the Property Community forum which is starting to attract attention and some interesting views.

Definition of a “Contrarian Investment Approach” :-

In finance, a contrarian is one who attempts to profit by investing in a manner that differs from the conventional wisdom, when the consensus opinion appears to be wrong.

A contrarian believes that certain crowd behaviour among investors can lead to exploitable mispricings in property markets. For example, widespread pessimism about a property/property market can drive a price so low that it overstates a property market’s risks, and understates its prospects.

This is a very interesting and topical debate now being held in many investment markets around the world where asset values have fallen substantially and investors are at a loss as to what to do next. This has seen more and more investors sitting on the sidelines while property values continue to fall with a growing number of parties now desperate to sell their properties. A contrarian investment strategy is literally “thinking outside of the box” and basically taking a vastly different investment approach to the masses.

The general consensus about a contrarian investment strategy

While the thread is still fairly young it is attracting more attention as people begin to think about how they tackle future investment strategies and policies. Of the five votes entered on the poll, four people are in agreement that it is time for a contrarian investment strategy with one person disagreeing. It will be interesting to see how this voting balance changes as more and more people come forward with their views.

The thread has introduced a number of interesting contrarian investment ideas confirming our suspicion that more and more people are looking at this specific angle. Lord Goldsmith seemed to be a fan of the contrarian investment style with his favourite quote being” the reason I’m so rich is because I always sold too soon” which just about says it all.

Retirement funds

One interesting post on the thread is suggesting that more and more of those approaching, or in retirement, are looking to invest their retirement funds in affordable properties in countries with affordable health care and a reasonable cost of living. What is interesting is the fact that this particular area of society is renowned for caution and for “waiting until things get better” in difficult times. If the poster is correct, it would appear that as retirement funds continue to fall in value we are seeing more and more people being proactive rather than reactive and attempting to take advantage of the current downturn.

Property investment groups

When property markets are flying high and everyone is making money, very often nobody is interested in working with other investors to try and leverage their funding and arrange better deals. However, this interesting tactic is being discussed on the thread with the suggestion that more and more people are looking at this particular option to leverage their own investment capital by using the power of “grouping”. The potential to acquire property fairly cheaply and then take advantage of the downturn in the building sector offers the opportunity to take control of your own property development and literally cut out the middlemen, i.e. the developers, which would reduce the cost significantly and potentially increase future profits.

Acquiring land on an existing real estate development

In normal market conditions when there is potentially enormous profits to be made from new real estate developments you would have no chance of acquiring a small parcel of land within a live development. However, more and more real estate companies are struggling to even get their developments off the ground and many appear more than willing to negotiate the sale of pockets of land within their overall development.

Not only does this offer group investors the chance to acquire land within a future development but also allows them to make use of the amenities which the developer is legally obliged to build as part of the project. This can substantially cut costs for those looking towards new builds and with a longer term investment timescale in mind.

Free land for group investors

While the idea of a property developer “giving you” a pocket of land would seem ludicrous in traditional market conditions, many contrarian investors out there are looking to make use of the ongoing downturn and come to an agreement with property developers. In essence the group investors would for example build 12 homes on the “free” land and “gift” 2 homes to the landowner to cover the cost of the land.

The benefit for the group investors is the fact that no payment is required for the land which has a marked positive impact on cash flow and the developer will have not only 2 finished properties in the end, but the potential to attract customers to the development which they will see as “ongoing”. Very few people are willing to take the chance of being the first investors in any property development but popularity breeds popularity and can be a very powerful tool to use.

Free land in Portugal

It would appear from the thread that a number of group investors have used and are using the “free land” strategy in Portugal. As well as the benefits which we have detailed above, there are potential positive tax implications for the original landowner when acquiring the properties as “payment”. However, whether these are strictly legitimate or not is very much open to debate.

As you might expect from an investment strategy which effectively cuts out agents and reduces their commission income, the “free land” investment strategy is very much an under the counter transaction (but still totally legal). These potential deals are not advertised in the popular property press and it may well take some positive action by group investors to find such opportunities. However, for those willing to take the chance and put in the time there are potentially lucrative deals out there.

Conclusion

while there is no doubt that the current property downturn has been severe and scared off many potential investors around the world, those who are looking a little longer term and considering using contrarian investment strategies have the potential to make significant gains in the medium to longer term. “Thinking outside of the box” is a term which is often used and when mastered can often result in a significant return on your investment.

Property sellers and property developers are literally crying out for liquid cash or the potential to start or continue their property developments. In many cases we have seen people agreeing to deals which they would never have considered in the boom times with the potential for all parties involved to benefit in due course. The bottom line is, if you don’t ask you will not receive as nobody will place a potentially lucrative situation and lucrative deal in your lap!

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