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A TALE OF THREE US CITIES

12 July 2013

New York, San Francisco and Chicago Stand Out From the Crowd for their strong investment potential

After years in the doldrums, all the signs are that it is a great time to enter the US property market.

According to the Bureau of Economic Statistics, the national economy is recovering well, with GDP growth reaching 2.5 per cent in the first quarter of this year. The job market is also improving, and at 7.5 per cent the official unemployment rate in April was at its lowest level since the beginning of 2009.

Mortgage interest rates remain significantly lower than five years ago and the dramatic drop in the number of residential units completed since 2008 has resulted in a supply crunch in most cities.

As America's property market begins to recover – the S&P 10-city composite index has increased 7.6 per cent since January 2012 – rising entry costs in global property hotspots are making the US a very attractive investment proposition. In Hong Kong and Singapore, acquisition costs of a US$1 million purchase can be up to 24 per cent of the property value – the equivalent figure in New York is only around 4.4 per cent.

Within the US, three particular markets currently stand out from the crowd for their strong investment potential. New York offers the best mix of low-risk/highreward opportunities; San Francisco continues as the best-performing market in the country; and there are some tremendous opportunities for investors in Chicago, which continues to offer excellent value and high yields compared to other major cities.

NEW YORK

A perennial favourite and the preferred US destination us real estate for wealthy foreigners, New York's international financial and cultural capital status makes it one of the few super-prime property markets in the world.

Underpinned by a lack of new buildable land and the highest population density in the US, the New York property market remains very strong. According to the Case-Shiller Index, condo prices are up 12 per cent in the year to February 2013, although they remain 6.7 per cent below the 2007 peak. With rents significantly higher than 2007 levels, this means the yield situation is excellent. A vacancy rate of only 1.6 per cent combined with a seven-year low in for-sale inventory is driving growth in luxury development in Manhattan, which is in turn pushing up prices throughout this prime district.

There are several areas within New York that are worth keeping a close eye on. According to the real estate and rental listings site Trulia, the Financial District offers prices 22.8 per cent below the New York average – US$1,009 per square foot for the most recent quarter – while the ongoing regeneration of the World Trade Centre is poised to drive property values higher.

The boroughs of Brooklyn and Queens are benefiting from a "flight to value" effect as buyers look outside of Manhattan for lower prices. Property values are rising and new development is booming in the district, while transport improvements are cutting once-arduous commute times significantly.

In Midtown, zoning changes have created a surge of ultra-high-end residential developments in what is a traditionally commercial area, including the ongoing regeneration of West Side.

The most affordable neighbourhood in Manhattan is Harlem, an area offering strong capital growth prospects and high-yield potential. Research by Trulia found that the district's median sales price in February-April 2013 was still 28.7 per cent lower than the New York average, despite an increase of 46.5 per cent against the same period in 2012.

SAN FRANCISCO

Over on the west coast, San Francisco's technology industry continues to boom, and recent IPOs have created thousands of new millionaires in the San Francisco metropolitan area – per capita income is 47 per cent higher than the national average.

The city offers many of the same benefits as New York, including a severe inventory deficit and a lack of land available for new builds. According to the CaseShiller Index, although San Francisco is the best performing condo market among major US cities, with prices up 28 per cent in the year to February, home prices are still 30 per cent below market peak. The local rental index also saw a year-on-year increase of 16 per cent to March.

Mission Bay is one among a few areas to watch. Located between two major masterplan redevelopment projects, it's one of the city's fastest growing residential neighbourhoods. Another is the South of Market, or SoMa, area. Known as "San Francisco's Brooklyn", this formerly blighted area is undergoing rapid residential and commercial gentrification and currently offers a median price discount of around 15 per cent compared to San Francisco overall.

The north-west districts of Russian Hill, Pacific Heights and Nob Hill are the city's traditionally prime areas. Home to San Francisco's wealthiest residents, they represent the least volatile part of the local housing market and therefore are strong candidates for ongoing investment.

Entering the market isn't necessarily straight forward, however, as there are very few opportunities to invest in reasonably priced, high-quality projects. Investors should be aware of the potential for such rapidly rising prices to cause significant yield compression.

CHICAGO

As the third-largest city and second-largest business and financial centre in the US, Chicago real estate opportunities are well worth considering. The city's lowtax environment compared to the likes of New York and San Francisco makes it an attractive alternative destination for property investment.

Chicago remains the most attractively priced major US city relative to pre-recession peaks. With the local Case-Shiller Index still around 32 per cent below its 2007 levels, it is significantly more affordable than places such as Los Angeles, San Francisco and New York.

Like many other major US cities, Chicago suffers from a severe lack of inventory. The Case-Shiller Index shows that condo prices rose 8 per cent in the 12 months to February. The yield situation is also excellent, with gross yields among the highest in the country at around 11 per cent. The market is particularly enticing for investors who missed the post-recession lows of New York and San Francisco. As the Chicago rebound has been slower than other major US cities, investors still have the opportunity to enter the market from a very strong position.

Particular areas worth looking out for include Chicago's central business district, the Loop. The area is traditionally more commercial than residential, but this is changing as a decade-long trend of suburbanisation begins to reverse and city living becomes more desirable.

The South Loop is currently benefiting from favourable tax incentives from the city which are stimulating numerous high-end developments in the area. Comparatively affordable and with improving liveability, this is another area seeing a strong "flight to value" effect from both developers and residents.

With its proximity to the Loop, Lake Michigan Water Front and the city's best universities, the North Side continues to be one of the safest bets in the Chicago market. Home to a mix of new development and redevelopment, the area offers a wide variety of options for investors.

While New York, San Francisco and Chicago offer a strong range of options for the wise investor, it is also worth keeping an eye on developments in other markets. Price points and risk levels in Boston and Los Angeles are certainly less favourable at the moment, but there is scope for improvement. Elsewhere, risk remains across many markets in the US despite all the positive signs. The best advice is to stick to major cities with solid underlying economic fundamentals. 

IP Global

Written by IP Global

IP Global’s full-service approach is built on extensive market research and analysis combined with a significant financial commitment to every investment we offer. We are able to manage the entire investment process end-to-end, from sourcing, financing, and management to those all important exit strategies, making investment in real estate as straightforward as investing in more traditional asset classes. Our expertise, experience and strong record have produced over USD2.8 billion in international real estate investments in over 30 markets worldwide.

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