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 R2million, 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
By Magnus Heystek
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 R1million in 2001, and invested it into
the Stanlib Property Income Fund and
reinvested the dividends it would have
been worth almost R12 million10 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
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NOVEMBER 2014 – PROPERTY MOGUL ISSUE 2 17