This week I'd like to examine whether contrary investing works in the property market as well as the stock market. Contrary investing is buying 'unpopular' and hopefully undervalued stocks hoping for a better return than the norm. Click here to find out more about contrary investing. In the property market this would translate into buying property in 'unpopular' investment areas in an attempt to realize the same benefit. So the affluent areas of this world would be no-nos whilst the modest priced suburbs would be seen as better investments. This seems to be going against the philosophy that is a mantra in the property field, viz. Location, Location, and Location!

To extend the stock market and property analogy, a neighbourhood would equate to a company's shares and the mean selling price in an area would be equivalent to a company's share price.

Whilst the analogy seems apt there are a number of fundamental differences between the stock market and property.

• If you own a house, you can renovate it, you can't renovate a company you have shares in (unless you are a significant shareholder).
  
• The selling price of a listed share gives you a fair indication of the value of that share whilst a property is only worth whatever someone is willing to pay once you put it on the market. Surrounding properties can only give you an indication of value and estate agents might well be overvaluing the property by 10-20%. This doesn't take into account the agent's fees either.
  
• It is normally easy and quick to sell shares. Property takes a lot longer.
  
• You can't normally finance stocks. You can leverage property. A small side point here: This leveraging of an asset will magnify your losses or gains immensely.

It would also be a factor in how this value is measured. Is it the capital appreciation or the rent-to-price ratio that is more important? The rental in the more upmarket areas are definitely getting less in relation to the selling prices over the last few years and the rent-to-price ratio's are dropping to as low as 0.5% per month, figures more indicative of Cape Town properties.

The buy-to-let gurus will show you areas where the rents can cover the bond repayments and these are typically not the fashionable areas and this might well fall into the category of contrary investing. The focus in this investing is more focussed on the rental returns.

I think there are some similar benefits to be had in contrary investing in property although there are also caveats to this rule. Buying into unfashionable areas because you can get a good value on a property might be risky as the area might become even more unfashionable and your capital might well be at risk. If done carefully with the requisite knowledge and research it is these properties that will yield a better return if the area becomes more popular over time. The crux to this investing then, would be to trend spot and identify areas that are up and coming areas where the growth on your investment would be maximised.

Article by : Dave Welmans - (www.thepropertygame.co.za)