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Hot Property – Investing in US Real Estate

28th May 2021
The US economic rebound from the depths of the pandemic is rapidly regaining momentum. Annualized Q1 2021 GDP growth was 6.4% according to the Commerce Department, the highest number recorded since 1984.  To quote the Financial Times (29th April), “Real GDP was just 1 per cent shy of its pre-pandemic level. ” To quote President Biden, America is “ready for take-off”.  

Unsurprisingly, this renewal of confidence brought about by the accelerating US Covid vaccination programme, coupled with $1.9tr Biden stimulus, has lifted the US stock market with the S&P 500 Index rising over 11% in the first four months of the year. It is arguable however that the US property market is proving to be the big winner, with the Dow Jones US Real-Estate Index, a measure of publicly traded real-estate securities, rising 15.4% in the same period.

In short, US property is hot. According to Mansion Global, home prices were 21% higher in April 2021 than in April 2020, with 48% of properties selling at above the asking price.  Commercial real-estate is following suit, boosted by a perfect storm of US domestic and cross-border investors keen either to take advantage of generous tax breaks, to look for a safe-haven investment for money potentially threatened by unpredictable governments (in parts of Latin and South America), to hedge against inflation fears, or perhaps to gain a Green Card (an option proving particularly popular with HNW individuals and families from India and China).

The attraction of real-estate was highlighted in figures published in early May, which showed a jump of 4.2% in the US Consumer Price Index. This caught the markets by surprise, particularly since it followed an unexpected lift in the unemployment rate, which edged up to 6.1%. That said, increased investment interest in real-estate is not equal throughout the country. Among US nationals, there is an ongoing, pandemic-prompted, trend for corporations and high net worth individuals to move south. Florida and Austin, Texas are for example becoming real-estate purchase/investment hotspots.

In part this appears to be a response to the fact the northern states were/are more affected by Covid; also because of different approaches taken by different state governors. For example, lockdowns were more severe in California than in Florida (despite the fact that the Covid statistics are broadly similar).

The risk/return ratio on US real-estate investment varies by type of property or development.  One investment firm, which often partners with JTC, divides real-estate strategies into five ranging from ‘Core Plus’ (stable assets generating an immediate positive yield), through ‘Value-Add’ (property with lower than average occupancy levels ands and requiring renovation and/or physical improvement), to ‘Opportunistic’ (effectively the real-estate equivalent of distressed debt).

Through these and two other strategies – ‘Land Banking’ and ‘Build to Rent’ the optimal holding period varies (from two to seven years), and so does the cost of entry, the potential rate of return and the risk the investor will be taking on. For example, stable investment grade real-estate is low-risk, offers a medium-high dividend yield, but only a low to medium total rate of return.  Land Banking is also low risk but all anticipated returns arise from capital gain.

At the other end of the risk scale, an investment in underperforming or distressed real-estate is, not unexpectedly, a high risk strategy. Again there’s no dividend yield but the potential total rate of return is very high – if all goes well, that is.

Beyond these, and equivalent strategies, US investors are also taking advantage of Zone Funds, which invest in designated development projects (available in every US state), and offer substantial tax advantages. To facilitate these investments, JTC Group recently acquired NES Financial (now rebranded as JTC Americas), America’s biggest administrator of these investment vehicles.

Latin and South American (and some European) cross-border HNW families and family offices are also looking at the southern states, and while some of the highly capitalized groups are buying hotel or commercial complexes directly, the more usual investment approach, for those with $25m and up, is via accounts in unregulated funds or Segregated Portfolio Companies, usually Cayman or BVI registered. These structures avoid the costs commonly incurred by fund managers executing numerous transactions for single or multiple clients and are therefore cost-efficient to maintain. By segregating assets and liabilities, there are no cross liabilities between the portfolios.

For non-US individuals and families seeking not only to invest in US real-estate but also to live (and work) in the country, the US EB5 investment program may offer an attractive solution. In broad terms the requirement is an investment of between $900,000 and $1.8m in a designated project which employs (or will employ) at least 10 US workers. Such a commitment enters the investor into the EB5 Visa Program.

The range of investment choices and requirements means that while the US real-estate market is open, professional advice is required to aid in the selection of the appropriate low, medium or high risk/return approach.

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