There is a perpetual food-fight going on in the world of stock investing.

Proponents of ‘fundamental analysis’ attempt to ascertain the ‘intrinsic value’ of a company’s stock through looking at its financial statements and the larger macroeconomic and political environment. Their investment approach is to capitalise on discrepancies between the intrinsic value and the market price over a longer time-horizon.

Subscribers to the ‘technical analysis’ school of thought believe that it’s useless to look at anything outside of the stock charts because all of the fundamental factors are already reflected in the price of the stock. They attempt to predict the direction of the stock’s movement based on how it has behaved historically with a much shorter time-horizon.

I tend to lean toward the fundamental analysis side of the table. I personally think that the market is too intricate and complex to be completely ‘efficient’. For example, things such as the psychographic constitution of the management can’t be accurately reflected in the price at any given time. Remember when Elon Musk smoked ganja on Joe Rogan’s podcast and the Tesla stock took a hit? If investors knew that Elon was the kind of person to do something like that, it should have been reflected in Tesla’s stock already and the hit would have been minimal, if any. Events like these simply cannot be predicted by analysing historic stock charts to death.

On the other hand, a fundamental investor like Warren Buffet would try to understand the management of a company both on a personal and organisational level before investing for the long term. He would at even acknowledge and consider the esoteric billionaire tendencies and ideas of Mr. Elon Musk in his investments.

But what about when it comes to real estate investment? Would technical analysis work?

My opinion? Not really.

Trying to apply the technical analysis model into property investing is a fool’s errand. Yet so many still try.

Many amateur investors look at a price tend chart like this and come to a simplistic conclusion such as “Prices have been going up in general over the last 10 years and will continue to go up. I should jump in before it’s too late” or “Prices have started to drop since the end of last year and will continue to drop in 2019. I better stay out”. This is a very simple form of technical analysis, where the investor purely looks at price trends or patterns and attempts to predict future prices without any regard to fundamental elements.

This kind of simplistic pseudo technical analysis is dangerous and ill-advised. The issue is that developers and agents often leverage price charts like these to create FOMO (Fear Of Missing Out) and urge people to make perhaps the biggest investment decision of their lives in a state of fear and haste.

Unlike the stock market where transactional data is directly and immediately reflected in the charts, property sales data is much slower to come to light. Even if somebody makes an offer on a property today, it can take up to 90 days to complete the transaction depending on where you are. After that sale is recorded and all stamp duties are paid, it will still take a while for government statistics bureaus to compile and release the data. By the time the analysts get their hands on it and present a pretty chart in front of you, you are actually looking at months-old data. This kind of data is useful for broader retrospective analysis and understanding of the market, but it’s not something you want to base an immediate investment decision on.

If you want to understand the actual on-the-ground situation in property, the best way is to build a relationship with an active property agent. They will have a much closer pulse on what kind of offers are being made in the moment, if any.

You could also look at the price movements of relevant REITs (Real Estate Investment Trusts) to provide a more up-to-date sentiment on the property market.

Another problem with making real estate investment decisions based on broader market price charts is that property transactions are very individual. Unlike the stock market where every investor buying a certain stock at the same time gets the exact same product, no two properties are exactly the same. Even if they are in the same apartment building, they are likely to be in different conditions, have different views, and have a different story (Feng Shui is a good example). But much more importantly, every seller has a different levels of emotional attachment to the property and motivation to sell. Individual emotions and terms are a much larger factor in property transactions, and price can actually take a backseat in the negotiations at times.

In other words, unlike a stock transaction where there is no room for negotiation, you could get a great deal in a horrible market, or a horrible deal in a great market. It’s all up to the financial savvy and negotiation abilities of the investor.

Considering this, looking at outdated property market price trends and using that to speculate in the market can be a recipe for disaster. Neither is it a good idea to purely go on the historic sales data of the particular property in question. Properties in general don’t changes hands very often so the data is likely very spread out and offer little insight toward its current prospects as an investment. If it actually has a ton of recent transaction data, you might want to question why it was bought and sold so often.

Obviously, I am not a believer when it comes to technical analysis for property. So what would I suggest?

Good-old top-down fundamental analysis. An introductory article on Investopedia says that fundamental analysis serves to answer questions such as:

  • Is the company’s revenue growing?
  • Is it actually making a profit?
  • Is it in a strong-enough position to beat out its competitors in the future?
  • Is it able to repay its debts?
  • Is management trying to “cook the books”?

To make this list of questions apply to property, all you need to do is simply replace ‘company’ with ‘property’‘profit/revenue’ with ‘cash flow/gross rental income’‘competitors’ with ‘similar rental properties’ and ‘management’ with ‘seller’.

As with fundamental analysis in stocks, it is also important for the investor to try and determine the ‘intrinsic value’ of the property. We know from 2008 that real estate markets can get frothy at times and that the ‘market price’ can change overnight.

Investors need to see beyond the speculative inflation of the price and look at the fundamental macroeconomic, demographic and political factors top-down. At the end of the day, a property is simply a place where people live, work or enjoy in some other capacity. It follows that the value of the property is in how many people want to live, work or enjoy that property, and how much they are willing to pay to do so.

The key is to view the individual property as a company or a micro-business (because it is), and put the emphasis on how much revenue it generates in relation to its expenses and liabilities. Ideally, you want the rental revenue to far exceed any expenses and liabilities. If it doesn’t, it’s akin to buying a company that is technically in the red.

This is quite difficult to find in a market like Hong Kong where property prices are very high, since even with the low interest rates the cost of the mortgage is likely to exceed or equal the rental income. This is one of the reasons we invest in the UK, where strong net cash flows can be achieved.

I hope this served as some food-for-thought in your property investments. I’m happy to hear any feedback or comments, thanks for reading!w

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