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Property mistake: The folly of holding on for too long

The price only rises so far.

A wise investor once said: we all make mistakes when it comes to investing. Being wrong is not the problem, but staying wrong is.

I have been living on the Dainfern Golf Estate for more than 20 years. Over the years I have bought and sold many stands and properties on the estate and it would be fair to say that I know it well.

As Dainfern developed over time, good stands became increasingly scarce. One in particular caught my attention. It was one of the last stands with a river view and was owned by a retired estate agent who always claimed that he was going to hit the jackpot with the site.

He reasoned that as it was the last great stand one day someone would pay a lot of money for it.

Fair enough.

In about 2001 I offered him R1 million for the stand, only to be told he wanted R1.5 million, which was way over the market price.

A couple years later I offered him R1.5 million – the market price – but he held out for R2 million, again way over the going rate.

In the meantime, he was paying treble levies as he had not developed the site in terms of the homeowners’ rules.

This little game continued for a couple of years; every now and then I would bump into John and make him an offer, and every time he wanted more than I was prepared to pay.

About two years ago, I happened to bump into him once more and again we had our customary chat about the stand. To my dismay, he told me he had sold it for R2.5m, as his dream of this huge payout simply did not materialise.

“You didn’t make any money,” I said. “In fact, on an opportunity cost basis, you lost a great deal of money.”

“What do you mean?” came the grumpy reply from John.

By holding on for 10 years he earned R2.5m rather than the R1m originally offered. However, minus estate agent fees and triple levies over 10 years, he was not left with a lot of profit.

I suggested that had he taken my offer of R1 million in 2001, and invested it into the Stanlib Property Income Fund and reinvested the dividends it would have been worth almost R12 million 10 years later.

The Stanlib Property Income Fund returned almost 22% per annum over this period of time and with no fees or levies to pay he would have had a very substantial amount of money in his investment 10 years later.

What mistakes did John make?

First, as Dainfern developed and filled up, other developments came onto the market in the area, each offering similar high quality stands which potential buyers could choose from.

That’s what happens with residential property; as prices rise developers bring new stock onto the market, thereby capping any potential upward move in prices. This is particularly the case on the outskirts of cities and towns where there is land. Cheap farmland turns into developments.

The only area in the country were you expect ever-rising prices would be on the Atlantic seaboard of Cape Town where there is no more land, or for that matter, New York or Monaco.

Second, he was not prepared to lower his accepting offer. What he wanted and what the market would pay were streets apart.

Third, he was not prepared to accept that he was wrong and he stayed wrong for a long time. Hubris came into play and it cost him money.

Listed property gives you access to the same returns with 100% liquidity, diversification and, for good measure, global diversification too.



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