Emilio Miguel of JTC Group
The US economic rebound from the depths of the pandemic is rapidly regaining momentum and the numbers prove it.
Annualised Q1 2021 GDP growth was 6.4% according to the US Department of Commerce, the highest number recorded since 1984. To quote US President Joe Biden, America is “ready for take-off”.
Unsurprisingly, this renewal of confidence brought about by the accelerating US Covid vaccination programme, coupled with $1.9trn Biden stimulus, has lifted the US stockmarket, with the S&P 500 Index rising more than 11% in the first four months of the year.
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It is arguable, however, that the US property market is proving to be the biggest winner, with the Dow Jones US Real Estate Index, a measure of publicly traded real estate securities, rising 15.4% in the same period.
In short, US property is hot.
According to the listings site Mansion Global, home prices were 21% higher in April 2021 than in April 2020, with 48% of properties selling at above the asking price.
Commercial real estate is following suit, boosted by a perfect storm of US domestic and cross-border investors keen either to take advantage of generous tax breaks, to look for a safe-haven investment for money potentially threatened by unpredictable governments in parts of Latin and South America), to hedge against inflation fears, or perhaps to gain a Green Card, an option proving particularly popular with high net worth individuals and families from India and China.
A tale of two houses
That said, increased investment interest in real estate is not equal throughout the country. Among US nationals, there is an ongoing, pandemic-prompted trend for corporations and high net worth individuals to move south. Florida and Austin, Texas are, for example, becoming real estate hotspots.
In part, this appears to be a response to the fact the northern states were, and continue to be, more affected by Covid and because of different approaches taken by different state governors. For example, lockdowns were more severe in California than in Florida despite the fact that the Covid statistics are broadly similar.
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The risk/return ratio on US real estate investment varies by type of property or development. This means the optimal holding period varies from two to seven years, and so does the cost of entry, the potential rate of return and the risk the investor will be taking on.
For example, stable investment-grade real estate is low risk, offers a medium-high dividend yield, but only a low to medium total rate of return. Land banking is also low risk, but all anticipated returns arise from capital gain.
At the other end of the risk scale, an investment in underperforming or distressed real estate is, not unexpectedly, a high-risk strategy. Again, there is no dividend yield, but the potential total rate of return is very high – if all goes well, that is.