I love irrational investment markets

I love irrational markets. Markets are generally irrational. They are founded on FEAR and GREED. Both very human emotional concepts and therefore arguably irrational.

Before i sail of into a voyage of Freudian analysis I think it is worth examining these concepts in respect to the state of the current stockmarkets approach to income producing property shares.

For the last few years markets have been getting carried away on a tidal wave of property investing euphoria. A lot of property investors have been making lots of money. Other investors have seen this and investors being GREEDY have dived in in the hope that they too will make lots of money. This forces the price of property making it less likely that investors will make money.

The realisation by investors and the markets that too many investors were investing in property and at too high a price has prompted by the so called 'credit crunch' has forced investors to dramatically reappraise their investment decisions. Many investors are thinking 'oh god i've paid too much for these property investment companies - lets get out.' Then the FEAR cuts in. They panic and sell. This forces down the price, more panic and sell forcing down the price even further. Its a property investment meltdown.

This is a great opportunity for all income monkeys.

Falling share prices of these property investment stocks have slashed their price. In the case of Mapeley which the Income Monkey is particularly keen on, by over 100% in less than 6 months.
Have the value of the assets of these property investment companies property fallen by that much, have their rents shrunk by that much, have their costs gone up by that much. NO off course they haven't.

YES - property investments were overvalued. The IPD index showed that UK commercial property returns in August were the worst in 15 years and that forecast show that 08 & 09 are going to be tough.

However this is the great thing for income seeking investors and savers.

• whilst property prices may come down rents a property companies main source of income doesn't. Lower property prices actually benefit income investors as they mean that rental yields go up allowing property investment companies to pay out even more in dividends.
• the values of investment property may go down, however, rents very rarely do. In fact GVA Grimley the property consultants research has predicted rental growth averaging 3% for 2008 & 2009. This means that rental income from which dividends are paid is generally secure.
• A falling property market is likely to knock consumer confidence reducing economic activity and prompting a cut in interest rates. This will reduce property investment companies biggest overheads meaning that their net income should increase giving them greater scope to pay larger dividends

All this seems to indicate that the equity markets are acting with exuberant irrationality. Investors should release that markets cant afford to act irrationally for long as the equilibrium between investor FEAR & investor GREED falls once again into an uneasy equilibrium.

Income investors and savers should ignore short term FEAR and look to the long-term income stream