Last week, East-West Property Advisors was covered in Capital Weekly, a Hong Kong business magazine, on the assessment of the US real estate market for Hong Kong real estate investors.
The appropriate city for real estate investments is very much dependent on the type of investor, budget, holding period, required cash flow and capital gain. As such, it is hard to recommend two cities that would meet all the criteria for each investor. Having said that, we see two cities that are of particular interest to Hong Kong investors at the moment, namely Miami and Memphis.
- Miami is a favorite city for investors looking for good capital gains in the medium term (3-5 years). The real estate market in Miami is still approximately 35% below the peak prices of 2007. Furthermore, Miami is a city that is undergoing a major transformation. Once a city that was known only for beach, sun and vacation, Miami has the goal of becoming a hub for finance, trade and commerce by 2020. The city is making significant steps to achieve that goal. Miami has now the second most international banks for an American city (New York City is number one) and many hedge funds/private equity companies are setting up offices there. There is also a lot of new infrastructure being built such as new museums, opera house, expansion of Miami port, etc. Lastly, the developer Swire has been actively investing in Miami and launched a new project in the financial district of Miami last year that will resemble Pacific Place in Hong Kong. All of these factors indicate that Miami is gearing up for major changes and these changes should positively affect the real estate market. It is certainly not something that should be expected in the next 12 months and clearly investing in Miami has more risk than investing in New York City, but there is good potential for investors looking to buy at a discount and invest for medium-term. New construction luxury apartments with many amenities and located in prime location in financial district are starting at about 2.4 million HKD.
- Memphis has been a favorite for many of our investors in Hong Kong who are looking for good cash flow. Rental yield can easily be 10-15% on a net basis for properties in decent locations. This is very attractive for investors looking to generate great rental returns. Memphis is the top distribution center in the US and has the second largest cargo airport in the world. Federal Express is headquartered in Memphis and you can almost assume that every single package that Americans buy online will pass through Memphis. This creates a massive demand for logistics, warehouses and other supply chain elements. Entry prices to buy a house in Memphis will be approximately 700,000 HKD. Of course, an investment here will require a local property management firm that will manage the investment property, find tenants, collect rent and address any repairs that might be needed. Our firm, East-West Property Advisors will work with investors to identify the appropriate properties and introduce to the local property management firms. Clearly, this city is different from cities such as San Francisco or New York as capital gains will be limited.
Clearly, the expectation is that interest rates are going to rise. However, there is still debate on the extent of the increase and the timing. Assuming a gradual increase of interest rates over the next few years, the effect on the US property market should be manageable. The US property market is very much driven by the creation of jobs and wage growth. As such, the Fed is expected to balance the degree of interest rate increases depending on the improvement of US unemployment numbers and rise in wages. As long as the Fed is able to do this gradually, the improving job situation in the US will temper any negative impact that rising interest rates might have on the real estate industry. While investors can try to time the market, we believe that it is more important to look at the fundamentals of a particular city or neighborhood. Depending on the time horizon of the investor to hold the asset, the required rental yield or capital gains, fundamentals such as local economy, job creation, schools and location are probably more important factors than the effect of interest rates. Clearly, a sudden upward movement of interest rates or any other shock to the economy will have a negative impact on real estate assets.
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