01 Mar 2015

Which Road Leads to Greater Riches? Location vs Timing

Adam Geha

01 Mar 2015


Location and timing are the two titans of successful real estate investment. Get them right (even if you get much else wrong) - and odds are you will amass a considerable fortune over the course of a lifetime.

But if these two roads diverged in a wood, which road would you choose: location or timing? Which of these two golden paths is likely to lead you to greater riches?

It's a trick question and - like most trick questions - the answer is "it depends".

"Location, location, location" is a mantra most applicable to investment in core property and residential real estate. If your intention is to hold the property for more than 10-years (i.e. you intend to hold the property "through the cycle") - and you have the financial capacity to do so -then location is paramount. This is because location is the best long term predictor of real estate values. To understand why, check out my blog: Real Estate Is A Network Asset.

On the other hand if you are investing in non-core real estate (so called "secondary assets") or development sites, then your mantra should be "timing, timing, timing".

Non-core real estate is highly volatile and can double or even triple in value in the course of one cycle. Get the timing vaguely right, and repeat for three cycles in a row, and you will amass a huge fortune (yes, larger than location-driven investors - albeit at higher risk).

To complete the line from the famous Robert Frost poem:

Two roads diverged in a wood, and I 
I took the one less travelled by, 
And that has made all the difference.

Timing requires contrarian thinking ("the road less travelled"); and contrarian thinking requires courage. To buy when everyone else is selling and sell when everyone else is buying is no easy psychological endeavour, but it is almost always handsomely rewarded.

Timing is in fact so critical to non-core real estate investment that, every three months, we shut the whole of EG down for 2-hours and get the whole team to sit in our boardroom to debate where we are in the property cycle. We consider 18 criteria across four categories: ease of access to capital, pricing of risk, market sentiment and potential international shocks. We assign a score to each risk factor, and then our PRISMS software computes a score between 1-100 to measure the "heat in the market" (or what the investment literature refers to as "systematic risk").

We've designed our process so that no deals are possible until our quarterly assessment of systematic risk has been performed. It's that important.

When the systematic risk score reaches 75, we pause all buying activity unless we have unanimous director approval to proceed; and when the score reaches 85 we activate disposal for all non-core assets unless we have unanimous director approval to hold. Why do we choose to sell before boiling point ? Because as Rothschild famously quipped: "I made my fortune by selling too early".

It is a system and a discipline that has served us well over the years and I would highly recommend that all property investors adopt a similar discipline. In fact, I would go so far as to say that if you do nothing else other than introduce a rigorous quarterly assessment of the property cycle, this alone will add 3-5% p.a. to your average annual returns.

So when my local real estate agent recently told me that it's all about "location, location, location" - I paused, looked him in the eye and said: "Like a wink and a smile, it may also have something to do with the timing."

Then I winked and smiled... but my timing was a little questionable and I think I left him a little bewildered.