Low purchase prices coinciding with a positive demographic trend - this is rare in the world's residential real estate markets says Oliver Georg, who reports on the investment opportunity in US multi-family
In the US, there are few high-net-worth buyers in the market for residential real estate at the moment, although the growth in population and rising tenant demand in the economic hubs of the coastal regions and the southern states are having a positive impact on local housing market revenues. That said, lettable housing estates are currently selling at discounts of up to 50% on their replacement value - and this is not just because some owners have defaulted on their loan obligations. Even project developers no longer able to market their apartments as condominiums the way they originally intended are now desperately looking for wholesale buyers for their residential compounds that were planned during the boom.
Another group keenly interested in selling are US pension funds over-allocated to real estate. In an effort to reduce their over-allocation they have started selling off parts of their real estate portfolios, and since almost no financing is currently available for office real estate acquisitions in the US, pension funds have tried to dispose of their apartment buildings first.
Even to sell individual residences and apartments on the domestic market is harder than it used to be. The government-subsidised mortgage banks Fannie Mae and Freddie Mac, for instance, expect investors to bring up to 25% in equity to a given investment. Then again, they do offer rather interesting conditions: their loan offers are attractive for high-net-worth investors because current loan interest rates will mean the equity will pay handsome interest.
Another reason that speaks in favour of apartment buildings is that they have the highest long-term return on investment of any real estate class in the US. While office and retail real estate averages annual returns between 8.7% to close to 10% over a 30-year period, apartment buildings offer annual returns of about 11% on average. The main reason for the sound performance of apartment buildings is generally not the absolute rental income but the comparatively low maintenance costs. Office and retail properties whose floor spaces are in constant need of adjustment by their owners to satisfy the spatial requirements of incumbent or incoming tenants will just not pass on as high a share of the rental income to their investors. Apartments, by contrast, do not have to be redeveloped at great expense for every new tenant. The real estate consulting firm CB Richard Ellis found that after the deduction of all costs an average of 83% of the residential rent revenues will go to the investors. This compares favourably to the 65-67% of the rental income collected by owners of office and retail real estate.
Another key argument in favour of a commitment in stateside housing estates is the positive demographic trend in the US, where live births, immigration and a rising life expectancy have driven population growth to 2 million new residents a year. Of a total US population of 305 million, around 70 million were born between 1980 and 2001; these belong to the generation of the so-called ‘echo boomers' who will enter the job market in the nation's economic hubs in the coming years, and who are therefore particularly interesting for the rental market. Add to that the fact that families tend to get started later in life than they used to, this implies a huge demand potential.
Moreover, in the medium term it is unlikely that this "Generation Y" will opt for home ownership and against renting. Given the credit crunch, home ownership is low on people's priority lists these days. Furthermore the generation of Americans aged 30 and under is more career-driven and shows higher job mobility than the cohorts immediately preceding them. Most of them tend to look for rental apartments in the catchment areas of the big cities, close to downtown, with easy access to public transportation, and with a rich range of recreational options to choose from in the immediate vicinity. In fact, the homeownership rate in the US has declined from 70% in 2004 to 68% in 2010 as a result of this trend towards urban migration.
Oliver Georg is managing partner, Behringer Harvard Europe