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Shorter term, stocks/shares vs property

Honest reporting on shorter-term trading activity and ideas
brightncheerful
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Shorter term, stocks/shares vs property

#102151

Postby brightncheerful » December 6th, 2017, 2:24 pm

Whilst reading the thread about investing in shares as a way to a million, I thought I'd estimate how well one of my clients has fared. In 1988, I advised the client on the purchase of a modest late Victorian property consisting of a shop and residential flat in a popular West London district.

The whole of the property was let for 99 years from the 1890s at a fixed rent of £10 a year and for the freehold interest the price was £16,000. Now £16,000 in 1988 was a lot of money but it wasn't an awful lot of money. In 1988 Base Rate was around 13% and adjusted for inflation (RPI) the equivalent today of £16,000 would be 167% increase at £42,718. Even so it would've been a lot of money for most private investors to afford to buy an income of £10 a year fixed for a couple of years until the old lease would end and could be renewed.

From the day my client bought the investment to date, the property has never been relet. Tenants have come and gone but the lease has always been assigned and renewed, no break in continuity. Managing the investment hasn't always been plain-sailing: sometimes a tenant has got into difficulty and the landlord having to accommodate rent payment delays but things have sorted themselves out in the end with no loss of revenue.

Currently the rent is approximately 7,750 times the £10 a year that my client got to begin with. Interest rates having fallen from about 13% to 0.5% has fuelled yield compression, such that a capital value of the investment on the old-school of thought of say 9-10% (circa £775,000) would today be around 4-5% (£1.55M) and possibly lower.

Of course, judicious choice of investment and knowledgeable advice (yours truly!) have played their part but neither my client nor I can influence the market, let alone the direction the market is taking. All I can do is interpret the market for the benefit of my client and advise on whether prudent to buy in the first place then whether to sell or hold onto the investment.

As for comparison with shares, the popular school of thought is to spread your risk which means that ensuring judicious choice of a basket of shares in different companies is challenging, but arguably just as challenging to find a suitable property for long-term performance. Warren Buffett suggests it's okay to put all your eggs in one basket, but watch the basket, is probably not for the faint-hearted - whenever i buy shares occasionally I prefer to buy only one or two companies (currently I have shares in three companies which is unusual) but I don't buy until the offer price is at a level i consider good value and i don't sell until I consider the bid price has overshot. (I wish I'd kept my shares in Adobe for which I paid the equivalent of £16 - sp now is the equivalent of £125)

In any event, the fact that it could be done doesn't mean it can still be done, Yield compression, QE, investors have so much excess cash and access to relatively easy borrowing that I for one would say that for finding a property or company whose shares are so underpriced the chances of a repeat performance are remote.

GoSeigen
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Re: Shorter term, stocks/shares vs property

#102187

Postby GoSeigen » December 6th, 2017, 4:21 pm

brightncheerful wrote:Whilst reading the thread about investing in shares as a way to a million, I thought I'd estimate how well one of my clients has fared. In 1988, I advised the client on the purchase of a modest late Victorian property consisting of a shop and residential flat in a popular West London district.

The whole of the property was let for 99 years from the 1890s at a fixed rent of £10 a year and for the freehold interest the price was £16,000. Now £16,000 in 1988 was a lot of money but it wasn't an awful lot of money. In 1988 Base Rate was around 13% and adjusted for inflation (RPI) the equivalent today of £16,000 would be 167% increase at £42,718. Even so it would've been a lot of money for most private investors to afford to buy an income of £10 a year fixed for a couple of years until the old lease would end and could be renewed.


Pray tell, how did your client find such a property for sale at £16,000 in 1988? My father bought a leasehold studio flat in a niceish part of Hammersmith that same year and it cost him more than £80,000. Buying a substantial freehold at 20% of that price seems inconceivable.


GS


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