How does a contrarian investment strategy work?

There are many different strategies you can use when looking to invest in real estate but the bottom line is that you should only use strategies with which you are comfortable. In these times of extreme volatility many investors are now looking towards a contrary investment strategy but what is this and how does it work?

While there is more to a contrarian investment strategy it effectively sees investors looking to work on the “margin” to give added value.

Fair value and sentiment

Whichever property market you look at there will be an average for the region, for the type property or the country as a whole. This will be a purely statistical figure which shows you the perceived real value of a property investment against the actual market price. It will depend upon whether we are in buoyant times or depressed times as to whether the actual market price is above or below the fair value. In effect, sentiment will play a significant part in the valuation of any investment whether this is overall market sentiment or sentiment relating to a specific type of property.

It really does depend upon sentiment at the time but especially in these current volatility times you will see significant fluctuations above and below the “real value” of a property.

How do you play on sentiment?

A contrarian investment strategy effectively means going against the market, going against the trend and going against the sentiment at the time. For example, if you believe there is good value in Spanish property then this might be a good time to look at an investment because sentiment is still depressed and many experts would suggest that market prices are significantly below the “real value”. In effect because the markets are so depressed, and there is still selling pressure with few investors looking to buy, it is possible to pick and choose your investments carefully and take advantage of the sentiment margin.

One of the advantages of a successful contrarian investment strategy is if you get your timing just a little off there is enough margin for error due to the impact of negative/positive sentiment. As and when investor sentiment turns you will see movement in market values even if their perceived “real value” has barely changed.

Selling into strength

If you look at successful property investors you will see that many of them will break the mould and sell their property assets “too early” when markets are rising. The idea behind this is to take advantage of the “demand premium” which pushes prices above and beyond their perceived fair value based upon simple facts and figures. Again, once sentiment turns and sellers begin to outnumber buyers this premium trend will change direction, impacting prices, without any major movement in the “real value”.

History also shows us that as markets become overstretched and “buying premiums” are extended the bounce back when sentiment turns can be severe and fairly quick. This is perfectly illustrated by the old Lord Rothschild saying, “the reason I am so rich is because I always sold too early”. The lesson behind this scenario is to always leave something for the next investor – i.e. sell before the markets turn.