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Try pitching US real estate to any investor. If they do not shut you off or politely excuse themselves, they probably know a thing or two about current market conditions — New York in particular.
It is no secret that many got burnt, having been caught up in lucrative derivatives-like, mortgage-backed securities and the real estate buying frenzy, resulting from easy refinancing on appreciating capital gains of properties. With the meltdown of 2008 still at the back of their minds, investors are understandably wary. I do not blame them.
There is nothing wrong in remaining cautious but do not to let it cloud your judgement. The US has undergone two quantitative easing programmes since the subprime crisis, both of which have successfully stabilised the economy. GDP increased by 2.5% in 3Q2010 followed by another 3.2% in 4Q2010. The upward trend is expected to sustain itself through 2011 and peak at 3% in 2012, according to data from Trading Economics. Some concerns have been expressed over Standard & Poor’s outlook cut of US debt from “stable” to “negative”, amplified by the IMF’s 10.8% of GDP deficit forecast for 2011 — all of which threaten the dollar’s use as a global reserve currency.
Nonetheless, the recent long-term visions set out by US President Barack Obama and Republican congressman Paul Ryan for deficit reduction are certainly positive steps forward.
New York’s real estate market has shown tenacity over the past three years. Unlike California, Arizona, Florida, Illinois and Michigan, where foreclosures represent 50% of the country’s total, New York’s market has held relatively steady despite an initial sharp drop in prices. The median sales price for 1Q2011 was up 9.8% y-o-y to US$1,065,000, with average price per sq ft recording a 17.1% increase over the same period to US$1,306, according to data from Trulia Real Estate. As one of the world’s leading financial capitals, the tightened supply levels in New York — with no new developments over the last two years — have led to a surge in demand, pushing up prices and rents. That explains why I have been bullish about New York for a good six months now.
Real estate investments should always be made on a medium to long-term basis. It is not a quick-changing speculative instrument as we have all learnt. Thus, potential rental yields play a major role in determining a purchase. Obtaining mortgages on apartments in the US for overseas buyers has proved difficult over the last two years, rousing up the rental market even further. Keeping that in mind, the net effective median rental price in Manhattan — where IP Global recently launched The Sheffield — with the inclusion of concessions, rose 7.4% in 1Q2011 y-o-y to US$2,808, according to Prudential Douglas Elliman Manhattan 1Q2011 figures.
New York City has been the spotlight of the state’s property market, citing one of the highest priced real estate in the country. Over the past year, I have — together with my property investment firm, IP Global — conducted extensive research on Greater New York and found Jersey City to be an extremely promising location, anchored by Wall Street moving back office operations to the Exchange Place and Newport City neighbourhoods. It also has one of the best transport infrastructures in the US with the PATH train making Jersey City only seven minutes from Wall Street. At US$245,000, Jersey City’s median sales price is only 22% of New York City’s (Trulia). In fact, IP Global has already put down investment on two freehold developments, 77 Hudson and The Saffron. Both are expected to generate gross rental yields of 5.78% and 6.5% respectively, with financing available up to 50% (loan-to-value) from Complete Finance — a mortgage brokerage unit of IP Global focused on finding the best financing options for its clients.
Capital values in Jersey City are now 50% below the peak prices achieved in January 2007. This drop offers investors a real opportunity to enter the market at a low price point. Property prices are on average one fifth of the price of a similar property on sale in Manhattan as a result of significantly lower taxes and strong yields.
All in all, Jersey City presents a range of interesting investment opportunities. Property-related taxes vary among countries.
Prior to making a purchase, it is important to gain an in-depth understanding of the laws that govern these taxes. In New York, there is no stamp duty when purchasing a property. However, there is a real property transfer tax when an owner conducts a sale. For a consideration of US$500,000 or less, the rate is 1%. It goes up to 1.425% for a consideration of more than US$500,000.
Keep an open mind on the US real estate market, especially New York, as it has started to show signs of long-term recovery.
Tim Murphy is a founder and CEO of IP Global, with over 20 years of experience in building profitable property investment portfolios. This article was published in the May 2 issue of The Edge Singapore.
This article appeared in City & Country, the property pullout of The Edge Malaysia, Issue 857, May 9-15, 2011
