Would you speculate on property in the UK and then trade the profit? I would – Op Ed

A question I have asked myself several times recently is whether it is worth investing vast sums of hard earned capital into illiquid physical assets with long-term value in order to provide the basis for short-term trading of liquid assets such as FX.

If the current searches that are being made on Google by the general population at the moment are any measure of others committing their cognitive resources to such follies, it appears that I am not alone.

GoogleTrends Twitter page has provided the top search results relating to the financial markets during the Brexit referendum period, those being, in order, 1: Euro. 2: Pound, no surprise there….

The third most searched item relating to the financial markets, however, is absolutely nothing to do with the financial markets and reaffirms something that I first saw happening among Chinese investors in mainland China’s development towns.

Indeed, the third most searched phrase relating to finance on Google this week is ‘house prices’. Not stocks, FTSE Indices, equities, or currencies, but house prices.

Investing in property bears about as much similarity to electronic trading as a brown bear does to a halibut, therefore it is perhaps at odds that it is stirring as much interest as the pound and the euro among potential retail investors this week.

Having spent a substantial amount of time in the closed, uniform world of mainland China last year, researching the vast, ultra-modern electronic trading industry that has established itself across the second tier development towns of Zhengzhou, Shenzhen, Guangdong, Guangzhou, Shijiazhuang, Chengdu, and some of the newer suburbs of Shanghai, I began to understand how property investment and FX can be related.

In China, the economic structure is completely different to any other nation on earth. Not only is the entire country locked behind the most sophisticated internet firewall that exists, preventing outside influences from penetrating the minds of China’s 1.35 billion people, but the country’s structure is arranged using communist principles to drive forward a massive and well organized corporate structure.

The Chinese government is vast, has a department for absolutely everything, and is a bastion of well-organized efficiency.

It owns a minimum 50% of every single business, large or small, in the whole of China, usually via a Chinese partner which is state owned and has specialist skills in a specific industry.

This means that the enterprising and educated Chinese new generation of business-savvy leaders can rise to prominence very quickly, with no liabilities and no barriers.

There is no commercial debt, no cost to employ management consultants, and very little in terms of barriers to success. The government invests in each business. They then provide management consultancy, and all of the structure required to operate, leaving the management team to concentrate, liability-free, on driving it forward.

As a result of this, one of the major industries in China is construction. It is quite common for a 25 year old investor to pay $20 million in cash to build a new 80-floor tower with apartments, offices, a shopping mall, and recreational facilities, especially in development towns where expansion is being encouraged and new industries are being built with the verve and vigor of a bullet train under full acceleration.

What are they doing with all that capital?

The Chinese property investors, of which there are literally tens of thousands, often look toward making their capital work for them. If an investor owns a vast tower, and has full occupancy, then he has a very large monthly income.

Some of the monthly income is his own earnings, however an increasing trend in China is to reinvest the proceeds from monthly rental collections on long-term assets (property) and enlist a portfolio manager who is often an IB of a large western FX firm, to trade the remainder of the monthly income, often on a high volume basis as the risk to the investor is low – he gets his monthly income from rent on an already owned outright piece of vast real estate which itself is constantly rising in value.

The result is that it is not unusual for IBs in these towns to be trading over 90,000 lots per month.

Whilst China is an economic powerhouse and is gigantic in scale, this model may work in post-Brexit Britain, on a smaller scale.

By a smaller scale, I mean the purchase of one house for investment purposes, taking a long-term view as the post-Brexit economy in London flourishes now that the European Union debt is a thing of the past, and the cost of bureaucracy rather than the fruits of meritocracy becomes a distant view in the rear view mirror, could be a potentially good vehicle for security of capital and provide a monthly trading income.

It is possible at this time to buy, as an example, a modern house with three bedrooms, gardens and a garage in immaculate condition, in a very high quality North West London suburb for approximately £550,000.

This is likely to increase substantially over the next two years, providing an investor with a capital base, and a monthly rental income of approximately £1500 to £2000 per month depending on exact location and condition, therefore giving a retail investor a long term appreciating asset, and a monthly income to trade liquid assets on a spot basis for immediate gain.

In terms of risk, a few trades that do not go in the favor of the trader could be written off without any liability because this is not a salary, nor is it the actual capital itself as that is already tied up in a property which is likely to appreciate rapidly. As a result, higher volume strategies could be traded for maximum short term gain whilst the property provides the long term peace of mind.

Better still, there is no lien on the property because the trading account portfolio would be funded by rental income, therefore it is available cash and does not require a loan to be taken on the collateral. Essentially if a stop loss is hit, then the trader would simply wait till the next month and carry on with no material damage.

In my opinion, not a bad idea.

As they say, in for a penny, in for a pound… or out of the EU, in for £550,000 in this case.