As you may have noted over the past couple of weeks, we have been looking at some high quality, special situations property opportunities for our clients. The comparison with some of the “bilge” being pumped out to potential investors by some property promoters is stark.
Take a comparison of being in an inner city ring e.g. not CBD and not 4kms out, in the ring around that, much of the research stacks up. There is massive demand, people earning cash and working in the relatively stable CBD environment and there is a diversified economy in the City. What’s more the demographic analysis supports this in spades.
Now compare that to investing in property in a mining town or say in the US in an area such as North Dakota, where the entire base case, is on the long term success of the oil fracking industry. The lure of a high yield has sucked in many investors to such opportunities and sadly the outcome is likely to be very unpleasant, with the oil price staying where it is.
Here is one example of chasing the wrong kind of opportunity – the one trick pony
Back in 2014, Boomtown America (Williston, North Dakota) could boast 1% unemployment, the lowest in the US, if the stats are to be believed. Reading an article recently in Fortune Magazine, the town’s Walmart regularly ran out of basic supplies, reflecting he strength of local demand.
The number of rigs drilling peaked at 207 in April 2012, currently; this is 97, according to the North Dakota government. This is clearly not great news, especially for those holding high yielding real estate in this kind of an area.
Looking for quality investment opportunities in the stock market is really very similar.
Basing your investment decision on high yields or higher potential return is really not the game to be playing, unless you goal is to generate a return from a highly speculative strategy.
These days, highly speculative is not something which is very high on investors’ wish lists, but let me draw a comparison, between the North Dakota Property market and a stock market investment.
Take the current environment, given the choice, would you be investing in Fortescue or BHP?
Fortescue Metals Group Ltd (FMG) is sitting at an incredibly cheap level – around $1.80 as I write, from significantly higher ($5.04 in August of last year). This compares with BHP Billiton Pty Ltd (BHP), which is sitting slap in the middle of its trading range at $30.
Why the collapse in Fortescue?
Fortescue is a pure Iron Ore play – that is all it does. The price of Iron ore has slipped just under $50 as at this morning’s price, from well over the $140 a tonne level just 18 months ago. At these prices, Fortescue is perilously close to selling its product at production costs – e.g. no margin. This is simply not sustainable unless someone is prepared to underwrite it, for a while…
By contrast, BHP has a lower cost of production and a more diversified range of products. While times are tougher, it can weather the storm.
The lesson here…
Be extremely careful on how you decide what assets to buy and why. Be that property or shares; banking your financial future on a one trick pony is a brave move.
I have heard it said that fortune favours the brave, but playing the game of speculation is red or black. Rather than take a punt on which direction the share price will run, how about getting paid upfront and immediately for time passing by?
That is what I am doing and so too are many of our clients, so why not you too?
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