Inefficient Real Estate Markets

I come from a stock market background and have started looking at property more seriously in the last couple of years to diversify. I tend to be very analytical and rule based which may provide some explanation for my thoughts below.

For the most part stock markets are highly efficient. Researchers are paid to publish detailed information on listed assets and therefore information is available quickly and widely to the marginal buyer, who is institutional and not retail. I'm interested in where information travels though markets inefficiently, and therefore you can access information ahead of the marginal buyer legitimately.

Real estate markets, in particular relating to development approvals, changing town plans, infrastructure projects etc seem to have plenty of hints ahead of the official release of the information through freedom of information requests and council meeting minutes, if you look hard enough. What potentially creates the inefficiency is when the marginal buyer doesn't put in the effort to look hard enough (generally not the case in stock markets).

My question is this: do you feel, as buyers, that you can legitimately obtain enough information that the competing buyers don't have (not don't have access to, just haven't trawled through the 96 pages of last week's council minutes) and if so, do you put the effort in to do this? Or do you rely on other forms of staying ahead of the competition i.e. negotiating better, relying on broader, known market trends?

Thanks!

 

There are companies that trawl through and list upcoming developments if you are willing to pay for it.

 

Do you know about "planning alerts"? That's free. Only problem is that you have to nominate address/es to monitor.

 

Yes I know about them however these do not capture all planning.

 

Interesting, I haven't heard of this before. Do you have an examples I can look up?

 

BCI Australia
Cordell

These are both research companies that report on upcoming commercial projects.

 

My simple answer is yes. The problem isn't can it be done (many are doing it successfully already) it's more a matter of are you willing to do what's necessary to get that edge . Personally for me, this is what it comes down to:

1. Having a thorough understanding of basic real estate principles/strategies .
2. Developing superior negotiating skills than most other players
3. This is a big one, building and developing solid relationships with the right people, from the brokers to the REAs to buyers agents to other development consultants etc. imo the relationships is invaluable.
4. Understand how to do thorough due diligence ( on the sellers themselves too) faster than most people and know how to use clauses to your advantage while keeping sellers happy and taking deals off the market asap. You don't ever need to trawl through 96 pages of nonsense. You just need to know how to leverage the expertise of the right people .

The thing is, very, very few people have this level of commitment. So results will vary greatly which is where opportunities arise to make big money.

My most recent example I was on holiday overseas while seeing a great site in Brisbane. I assembled my team and had it under contract in days, got subdivision approval recently granted and it hasn't even settled yet.

 

Inefficiency in a market is great if you know how to exploit it. (Which is why I have made great profits in property).

Stocks, whilst always having a clear market value also actually also very prone to misvaluation (both above and below fair value) and I have also time and time again used this to make money in stocks.

 

I am a developer and it's very simple all you need to monitor is supply and demand, if you buy the land when rising you will make money, if you get the timing wrong good chance will lose money

 

Marrisa I think you and I both know it's not quite as simple as that. There is finance, town planning, feasibilities, risk mitigation, structures, accounting implications, project managing etc etc etc.

Essentially I agree with you that if you can develop in a rising market you should be able to make money but then if some of those factors I mentioned above are seriously compromised, it can affect the results dramatically imo.

 

Appreciate the principle but buying when prices are rising isn't always a competitive edge as you never know if you are going to be the last one in at the top of the market.

I've heard mixed things about agents being across things like residential land rezoning, development approvals etc e.g. Moreton Bay rezoning some areas and buyers being across it before agents. This sounds great if you're the buyer, but if you're trying to establish a long term relationship do you just keep talking to a few until you find the ones that are clued in and do their homework rather than relying on a good sales pitch?

 

Forget about relying on anything agents say or any number spreadsheets they supply you with showing profits. It is one thing to take on board what they recommend but then you need to apply independent DD and your own feasibility to see if the deal is profitable. Most agents have their own agenda and will never work for your interests 100%. It's just the way it is. They have many parties to please including their own interests. Town planners are also another great resource to have working with you and many good deals can be found that way, but again, you need to then do your own DD and run the numbers. There is no quick, easy solution to making easy money with developments imho.

 

Agree!

 

of course

My point is market conditions when developing important factor but seems to be ignored.

 

re agents in general do not provide feaso etc as they are not developers, this has been my experience?

 

I've had agents on a number of occasions want to pass on feasibilities to me that others have done to try and persuade me that property is a good buy .

 

I'm still a newbie here, buy houses strike me as different to shares in a couple of major ways.....

Notably you live in a house.

This has major implications on what a house is worth, and depending on the emotional state of the buyer/seller - the price too!

There's no doubt the macro stuff affects things ...Just look at Perth and Sydney...but there's a whole lot of micro stuff (renovations, family issues, neighbours, maintenance) that makes a huge difference and markets within markets etc....

I am unsure that the analytical approach the OP proposes, whilst certainly having its place, will provide the full picture.

 

As a round about way of answering your question.. I believe property isn't really directly comparable to stocks / "rational market theory". This belief stems from the fundamental nature of people trading in those markets.

Everyone buying in the sharemarket is doing so for purely financial reasons, they might be aiming for growth, aiming for income or purely defensive purchases, but they are financial.

In the Real Estate market, you're often competing against or buying from people who are in that market purely for shelter or real estate & those buyers are not always rational, nor often are they particularly efficient. E.g. its not my thing, but a lot of members on here have had great success with "sweat equity" via cosmetic renos. You can take a property that doesn't appeal to those non-financial investors because of its condition for $450k, spend $100k on it and its now appealing to them and worth $600k+. You cannot buy a bundle of shares, spend $100k more on shares grow the value to $600k+.

Edit: unless you're a whale and you're taking over companies Buffett style or PE style.

 

Ditto . I've spent a lot of time studying share markets but haven't been able to make money consistently and given how easy it is to make money in property I don't bother now .

Most people in property are either home owners or uninformed investors so act as the proverbial herd . Many of the so called commentators are more concerned about not being wrong ...

I do look at fundamental so I want capital or major regional centres with solid diversified economies . Within that group I want to see low vacancy rates ( so I get tenants and can afford to hold properties )

First indicator i look at is ten year average and I look at which places are under performing and those are the first places I look at . ( Sydney 2009 - 2013 ).

If some where is going down , I don't buy . It takes a while for a market to change direction .

Historically the cycle starts in Sydney , then goes to melbourne , then Brisbane / Adelaide / Hobart . Perth and Darwin tend to be driven by their local economy .

Basically I'm a trend follow and I find that support resistance lines also hold true . It's worthwhile looking at stock in market as that is a good indicator for confirmation .

The averages used in property are usually a 12 month moving average so they don't pick the bottom as it's happening . If you are out looking at properties or talking to enough REA's you can improve your timing .

Cliff

 

Good points, the cycles in real estate do move far slower meaning the ripple effect of capital is far more observable than in stock markets.

In terms of being able to obtain more information through hard work than the marginal buyer I found the article below a good read, and especially the research paper behind it for those that really like their numbers. It's talking about very large zones being developed rather than the odd apartment block here and there, and the average investor isn't in the market for 100ha at flagstone, however it does raise some interesting points on less ethical ways to get ahead in the game.

Four ways we can clean up corruption in land rezoning