Bethelle Desmond
Shelter Island Arb Part II “The Mystique… And the Math”


Shelter Island, NY

Although there are a million reasons to fall in love with Shelter Island — a very smart reason is the relative land value vis a vis surrounding areas. Being an ex-derivatives trader, I describe this phenomenon as an ‘Arb’ or arbitrage opportunity. An Arb, for those of you without an old, inescapable Wall Street mentality, is a trade that returns a profit through the purchase and sale of similar assets which are priced differently as the result of inter- or intra- market inefficiencies. That’s exactly what is happening out East. Hamptons prices are through the roof while on Shelter, gorgeous land and homes are on offer at, respectively, excellent values. Sell Hamptons, Buy Shelter — It’s the Shelter Island Arb!

Arbitrage

I have a friend who recently renovated a four bedroom, four bath home on a canal in Noyac, Sag Harbor. Her long term plan was always to downsize once her kids went off to school and bank the difference for retirement. With her youngest entering high school she started to think more seriously about her options. Given the location (water front), acreage (2.4 acres) and privacy of her property, she was told she could probably get about $3.5 million for her home.

Her financial advisor told her she would be in pretty good shape for retirement if she could bank $2 million in her up-coming downsize. But when she started looking around Southampton, Sag Harbor and Easthampton for properties in her price range — around $1.5 million — she was shocked to see how little her money could buy. That is, until, she started looking on Shelter.

‘’The Captains House”, 11 Locust Avenue, Shelter Island Heights

On Shelter Island she found the home of her dreams. A beautiful 1880’s Victorian that sits up on a bluff overlooking Chase Creek as it ambles out to the Peconic Bay through Derring Harbor, steps from town. The home is situated in Shelter Island Heights, an exclusive historic hamlet on
the island (and one of the country’s Richest Zip Codes!). Designed in the 1870’s and essentially unchanged since then, the Heights is a beautiful example of the “picturesque, naturalistic landscape and romantic rural residential areas created by the first generation of American
landscape architects
”.

From the beginning, the Heights was conceived as a community with
parks and open spaces. The hamlet boasts 6 parks, two sites of tennis courts and an adjacent golf course, complete with cart and club rentals and a GREAT restaurant, The Flying Goat. But the crown jewel is a private beach club, decked in red and white awnings with picnic tables, snack bar and cabanas. All the original roads in the Heights are laid out in a series of sweeping curves that descend in a broad scallop pattern to the water’s edge. The town looks as if fallen, from a Norman Rockwell painting.

Historic Shelter Island Home, Built 1883

My friend was able to buy her four bedroom, 3 ½ bathroom home, with water views, for $750,000. Yes, it needed some up-dating, but was probably still running at least about 75% under the price of something near water, in town, in the other Hamptons. A property, for instance, overlooking Agwam Park in the center of Southampton village could run $3 mil, easy.

Additionally, because the price was so reasonable, and the economic prospects of Shelter so convincing, my friend bought a building lot adjacent to the property. She paid $200,000 while ‘knock downs’ (when buyers buy a home with the soul intention of ‘knocking it down’ for the land in order to rebuild from scratch, a.k.a. land values) are rumored to be trading at over one million in other desirable Hampton hamlets. Now, 2 years later, she reckons that the house would go for over 1 million and the lot for probably about $350–400k. Some quick math points to about a 30% increase in value. Are you getting that in the market?

So, if you were a derivatives trader like me you’d be looking to buy an asset 1) at a price below where like markets are trading, and 2) that you had reason to believe would go to par with those like markets. At a quick glance, Shelter has a better recent historical appreciation and a better forecasted return than other Hamptons towns. Enough to get even an old commodities trader excited!

But ,’Yes’, there are a bunch of reasons, you could argue, why Shelter Island will never perform like the other enclaves of the East End. But maybe… just maybe — it’s time to get long (read buy) — Shelter Island!

Sunset at “Sunset Beach”, Shelter Island, NY



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