Know when to hold ’em

AACI | Vice President, The Regional Group of Companies Inc.
  • May. 14, 2014

John Clark“I think the problem today is short-termism is so overwhelming that you see confusion in politics — it appears that governments have a hard time moving forward working on long-term policies to empower and improve a country.”

So said Larry Fink in a recent interview with CBC’s Lang and O’Leary Exchange.

Fink is a man who warrants attention – he’s the chairman and CEO of BlackRock Investment Fund, the biggest fund manager on the planet, with $4.4 trillion in assets under management.

“Short-termism” isn’t a problem he sees limited to government, but a chronic problem for the private sector as well, as companies bow to the pressure of activist shareholders, and react too quickly to short-term movements in their stock prices, by boosting dividend payments, or shelling out millions (or billions) on stock buybacks.

“There are many instances we can think of in which the money would have been better put into investing in people, investing in plants and equipment,” Fink said.

But should it come as any surprise that our political and business leaders suffer from a myopic focus on the short-term, at the expense of the long-term, given that we live in a debt-driven culture that craves instant gratification and constant stimulation?

Our political and corporate elite are slaves to the whims of the masses, be it activist shareholders or fickle voters who care only about their own immediate needs. Woe to a society that is subject to the tyranny of a majority!

From cars, to homes, to retirement portfolios, there is a burning preoccupation with trading up, trading in and otherwise keeping up with those Joneses who always seem to have greener grass.

The fundamentals never go out of style

But the more things change, the more proven fundamentals matter. If you have invested in a quality asset, if you have carried out your due diligence to ensure you have made a wise purchase, the best strategy, more often than not, is to hold. It’s true for asset fund managers and it’s true for real estate.

I have a client who bought a small apartment building more than four decades ago. As far as commercial real estate investments go, it was a fairly modest purchase, with a fairly modest annual return of about six per cent. But my client held on . . . for more than 40 years.

That’s almost half a century of income generation – a stable source of revenue that can pay down debt, be used as personal income, or otherwise reinvested elsewhere and further compounded over time. And don’t forget, too, the annual six per cent capital appreciation over this period, of the property, maybe even of just the land itself, depending on where the building is located.

Research. Research. Research.

No one has the capacity to predict with any certainty where a given real estate market will be 40 years hence, but a little common sense can easily screen a wise investment from a foolish risk:

  • Consider the location of the property – is it adjacent to a new infrastructure project that will drive economic activity in the area? This could be anything from new places of employment to new public transit links. Perhaps Port Moody or Coquitlam, B.C., might be a place to look with the pending 2016 completion of the Evergreen ALRT line.
  • Is it in an up-and-coming urban area that is undergoing additional revitalization and reinvestment?
  • How up-to-date and in how good a state of repair is the property? Own any property for decades and periodic reinvestment will be necessary, but that cost must be balanced against the likely income the property will generate. Don’t forget the due diligence and avoid starting out in a hole – if you don’t have to.
  • How versatile is the property? It’s likely best to avoid specialized properties that have limited uses, such as a movie or stage theatre.
  • How likely is the land itself to appreciate in value? Given the circumstances, this may be where the real money begs to be made, versus with the building itself.

You get the idea. As I have said many times before, due diligence is key. Consider, too, the likelihood of passing the torch to a next generation of owner/managers. If you keep it in the family, it can continue to be an income-generating asset to provide for your retirement.

There’s always money in serving basic human needs

And remember – people will always need a place to live. Apartment buildings, provided they are properly vetted, usually are a wise, long-term investment. Rental accommodation in strong urban centres is almost always in demand – it’s often the only housing option for those of modest means, and a needed transition phase to home ownership for those of better means, or a downsizing option for down the road.

By that same token, don’t ignore the condo market, or, even better, the mixed-use market, where office space, retail and residential may be stacked together in the same building, conceivably putting a job at the end of every elevator – these developments promise long-term value for the savvy investor who gets in on the ground floor.

One such development, where people can “work, live and shop,” recently broke ground in my own backyard – the Westboro neighbourhood of Ottawa. Westboro Connection is in what’s become a very trendy neighbourhood, and is adjacent to the city’s coming Light Rail Transit system, connecting points west to downtown.

It will have a seven-storey office tower, a 126-unit apartment tower, street-level retail and underground parking. In Canada’s 13 largest cities, which now hold almost 57 per cent of the country’s population, living close to work or transit is going to become a really popular alternative to a long sit in the car.

Do I consider this property a great long-term investment? You bet.

Now, all of this isn’t to suggest money can’t be made with short-term real estate investments, but consider what your goals are, and how much of your gains can be lost to the various fees and costs accompanying any purchase or sale. My client held on for a really long time and paid transaction fees and costs only once. If you’re regularly flipping properties, you may forfeit what could otherwise provide stronger returns over time.

To discuss this or any other valuation topic in the context of your property, please contact me at [email protected]. I am also interested in your feedback and suggestions for future articles.

John Clark is Vice President with The Regional Group of Companies Inc. He has more than 33 years of experience in the real estate appraisal field, is a fully accredited…

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John Clark is Vice President with The Regional Group of Companies Inc. He has more than 33 years of experience in the real estate appraisal field, is a fully accredited…

Read more

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