In 2015, the US property market continues to receive more interest from Asian investors. What are the reasons for this trend, what returns do Asian investors make and has the US property market still room to grow?
Most Asian investors are redirecting their capital towards higher return markets that had faced significant challenges in the past few years but are now in the upswing. The US real estate market is one of those markets. In 2009, it faced the worst crisis since the 1930’s, the economy went for a severe downturn, the Dow Jones had a major correction and the real estate market went in freefall. In certain cities in Florida and Nevada, property prices dropped 70% and the amount of foreclosures increased exponentially. Savvy and cash rich investors went on a shopping spree starting in 2010.
Now we are 2015 but is it too late to buy property in the US? The answer is no. Nationally, prices in the US property market are still 20% below the peak of 2007 which is a sign that prices still have significant room to increase. Clearly, certain cities such as New York have surpassed their 2007 level but other cities such as Miami, Orlando, Chicago and many others are still below the peak.
Investors appreciate the fact that the US economy is experiencing growth again; unemployment rates are dropping, technology companies continue to create new products, interest rates are still low and optimism is back. Furthermore, the key message that you will hear from US realtors all over the US is the lack of supply or the lack of inventory of new housing. Local Americans are struggling to find homes to live in as developers have been reluctant to develop much new housing for several years (mainly due to the credit crunch). The result is a limited supply of new construction while demand is strong and is getting stronger every month. These are positive signs to buy in and take advantage of this upward trend.
What are the returns that are currently being made by investing in the US property market? Rental returns (rental yields) can easily achieve 10-12% net (this is rental return after paying all fees and expenses such as property taxes and property management companies). Rental yields of 10-12% are realistic numbers to be achieved in the Midwest. In certain cities such as Detroit, even higher rental yields of 20% can be realized. However, a 20% rental return might have significant other risk so investors need to be aware.
Capital return (capital gain) is, as everywhere, difficult to forecast. However, because of the lack of new construction, prices are expected to grow for the next 5-7 years. New construction has been limited due to the inability of US developers to obtain credit for several years after the financial crisis. This has been putting a strain on the supply side of US housing and has been causing prices to rise in several cities. As reported in May, the national median price of an existing single-family home rose 7.4% from a year ago, from $191,100 to $205,200
Both the attractive rental returns and the ongoing price increases in multiple American cities could offer interesting investment opportunities for investors.