Revisiting the investment thesis
I first wrote about US property being a legitimate investment class in September 2012. You can review the article here by clicking on this link. At the time I wrote:
- The US has experienced its biggest decline in housing prices in over 100 years and quite possibly ever. Consider that same 100 year period includes a great depression, 2 world wars, the Asian financial crisis, the fall of the Soviet Union and other rolling crises during that period of time. Since 2006, values have fallen in some cases by as much as 75%+, while the average decline is around 35% from the highs 6 years ago.
- Rental returns are soaring. It is not uncommon to generate gross rental returns well into the double digits and after accounting for running expenses it is still possible to own a property that pays you a double digit rental return.
- Savers in the US are getting close to no return for their cash in the bank and have been starved of yield for years.
- And US house prices have now risen for 5 straight months. While still early days, evidence is starting to mount that US property prices may have found a sustainable bottom. Just checkout this report from CNNMoney.
- Mortgage rates in the US for US citizens are also at record lows near 3.5% to 4%, helping to make housing more affordable than most could ever have imagined 6 years ago.
- All of these factors, combined with the current high Australian dollar means that Australian investors can benefit from a rare opportunity to buy property for investment and diversify their asset base into an offshore market.
Since then a lot has changed, BUT, there is also a lot that hasn’t. It appears overwhelmingly evident that the bottom is now in. It now appears that the worst is behind the US housing market and that prices should rise significantly from here in time. That doesn’t mean to say that it will be a straight line up, but certainly investors who are looking to take advantage of this huge opportunity are now doing so close to the bottom and with the trend as their friend.
Since the first article, UGC has successfully completed a tour of several US housing markets, established teams on the ground in each target market and now clients of UGC are taking advantage of this rare opportunity through our new Global Property Advocacy Service. This is a full financial and investment advisory service helping clients navigate the complexities surrounding cross-boarder taxation issues, tax structuring and planning, investment analysis, acquisition, asset protection, management and exit.
I am delighted with the opportunities we are finding for our clients and we look forward to helping others become successful global property investors.
So having said all of that, the big question is has this rare opportunity passed you by???
In a few words, NOT BY A LONG SHOT!!!
But, it won’t be here forever.
Firstly, I’d like to debunk some of the perceived risks regarding US real estate investment. In my opinion, these are seriously exaggerated. The US is not South America or Africa. It’s still the world’s superpower and most important economy, BY A FACTOR OF ALMOST 3x.
Sure the US has it’s problems, there is no denying that. But that creates opportunity. Consider this……… after real estate prices in the US crashed during the great depression, following the crash, US house prices nationwide failed to record a negative year of price appreciation for almost 70 years, despite numerous shocks, recessions, wars and other disasters.
From most of the research I have come across, the most recent property crash, which caused the GFC, was worse than that of the great depression and in many instances property values are more attractive.
Most of the bad press that comes from this type of investment comes from the fact that there have been unscrupulous operators operating out of Australia. Some of them I have met myself. But now that UGC has taken this risk out of the equation, let’s look at the facts……….
Over the past 12 to 18 months, many businesses exposed to US housing are rebounding at a rapid pace. Take US home builders for instances. These companies are now growing earnings at a rapid pace and their share prices are soaring. Take KB Home (+300%), Toll Brothers (+150%) and Lennar (+240%) since their share prices bottomed.
Take a look also at the US’s and world’s largest home improvement group, Home Depot (+150%) since mid 2011.
And what about the banks? Well Bank of America is up ~140% in a little over 15 months, JP Morgan is up almost ~80% in 18 months, Citigroup is up ~80% since July 2012 and Wells Fargo is now breaking out to new 52 week highs up 60% since mid 2011.
People are always scared of the unknown. But the good news is that global real estate investment no longer has to be an unknown.
Today, there is still a hell of a lot to like about US property investment and if you are still not sure about dipping your toes into this potentially highly profitable market, please consider this…….
The potential cash flow yield which can be generated is so high that you have much less risk of not turning a profit even without any capital growth. In many cases our clients are likely to generate gross & net rental returns some 3 to 4 times higher than that which you can get here in Australia.
Investors getting set now are getting set at a time when the AUD versus the USD is close to all-time highs, meaning the currency risk is lower today than at any time in the past 30 years. A strengthening of the USD over the long term not only adds to your capital value, in AUD terms, but also adds to your AUD converted cash flows. (Remember, however, currency risk can be a double edged sword).
This property crash was worse than the crash following the great depression and that recovery lasted almost 70 years without a nation wide year of negative growth.
Credit markets in the US are still very, very frozen, but they are slowly unfreezing. The sun is just starting to shine above the horizon again. This is important, because one of the biggest drivers of real estate price appreciation is the availability of credit and money. Once banks start to lend again in a material way, and this could still take some time, in a yield starved market, it’s only natural that you will see demand for housing start to tick up.
Right now it is considerably more expensive to rent than it is to buy a property with a mortgage in the US. This is providing incentive to those who can get access to credit to get access to it so that they can buy their own home. And consider what is happening to all those poeple who are now working their way out of their bad credit? Well check out this article from CNN Money . Clearly those that defaulted on their homes during the GFC are starting to work off their bad credit scores. Sooner or later they too will return as an additional source of new demand.
US investors are being forced out of cash and bonds into other cash flow assets such as shares and real estate, because US interest rates are so low. For retiring baby boomers, the cash flow generated from US real estate is in many instances many times better than US blue chip dividend paying shares.
Hard assets such as real estate have over time proven themselves as very good hedges against inflation. With the US currently printing USD$85 billion a month in new money, this money has to flow somewhere and it is now starting to flow into the US real estate market. The evidence appears clear, a bottom was put in around late 2011 and early 2012 and a lot of this demand is coming from large investment funds that are buying up distressed assets. Click on this article to see for yourself. My point is, right now you have an opportunity to invest alongside the “Smart Money”. This is a big tailwind!!
According to recent insurance assessments we have obtained, the properties our clients are acquiring (building and land) are selling for up to 60% below the cost to replace just the building. That is ridiculous value!! Plus the risks around damage, maintenance, tenancy are all reduced because of the due diligence we conduct on each property and the insurance we recommend clients take.
And regarding risk management, you don’t need USD$400k to get in at an entry level investment like you would here in Australia. You can make much smaller investments for an equivalent type property. Most properties we prefer are around USD$120k or less. You could buy 3 to 6 properties for the price it costs to buy one equivalent Australian property. That means you can manage risk a lot easier by being more diversified or simply by being not as exposed.
Also consider that fact that interest rates in Australia are at all-time lows. You can get a fixed rate loan today for less than 5%.
And if that wasn’t good enough, US home prices nationwide rose 7.3% in 2012, confirming the recovery has just started.
So if the concept of building wealth is the same to you as it is to us, that is “you are looking to build a diversified portfolio of high quality assets that produce above average and increasing income streams which can fund your retirement income needs”, serious investors should think seriously about this opportunity, because opportunities like this very rarely come around.
If you are serious about your wealth, then we encourage you to speak with one of our financial strategists today for a No Cost, No Obligation consultation on 03 8657 7640 or email [email protected]. We would be more than happy to review your wealth creation strategy and give you the advice you need for a more fulfilling life.
The information contained in this report is General in nature and has been prepared without taking into account your objectives, financial situation and needs.