US real estate market to remain resilient

This article first appeared in City & Country, The Edge Malaysia Weekly, on August 3, 2020 - August 09, 2020.
The property markets of New York (pictured) and Los Angeles, in particular, are expected to remain buoyant in the near future (Photo by Bloomberg)

The property markets of New York (pictured) and Los Angeles, in particular, are expected to remain buoyant in the near future (Photo by Bloomberg)

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Although the Covid-19 crisis has had a great impact on global markets across the board, the US real estate market, especially in New York and Los Angeles, is expected to remain buoyant in the near future.

According to the Knight Frank US Prime Residential Market Briefings held online on July 9, factors such as an exemption in estate duty of US$60,000 (RM255,120) for foreign nationals when buying a US property, no stamp duty and no requirement to comply with the Foreign Account Tax Compliance Act (FATCA) or the Common Reporting Standard (CRS) add to the markets’ appeal.

The panel of speakers at the online session included Knight Frank residential manager Georgina

Atkin­son, Douglas Elliman head of global markets Richard Jordan, Douglas Elliman head of research Andrew Wachtfogel, 111 West 57th Street director of sales Amy Williamson and Premier Fiduciary managing director Frank Jiang.

The panellists maintain that the US market has proven to be steady, with continued focus from state leadership on a cautious and disciplined reopening strategy. The session zoomed in on New York and Los Angeles and started off with the overall macroeconomic outlook in the US. “In terms of the macroeconomic outlook, these are unprecedented times accompanied by unprecedented opportunities,” said Jordan.

“In January 2020, we were experiencing a robust economy, the US was the strongest one (globally) at the time, the unemployment rate [was] at a 50-year low [at 3.5%], the stock market was reaching new highs and breaking records on a consistent basis and overall consumer confidence was very high. Like all markets, the US market has now been impacted by the pandemic.

“The US government imposed the Coronavirus Aid, Relief and Economic Security Act in March 2020, and this is the largest care package in US history. The CARES Act put significant liquidity into the marketplace, and that is to backstop the US economy. Since then, we had 7.5 million jobs added in May and June 2020, and interest rates are as low as 3%. We have seen a recovery in the equity market, and the stock market has rebounded back to the 1Q2020 level, with the Nasdaq reaching an all-time high in June.

“Owing to significant volatility in the stock markets, ultra-high-net-worth individuals (UHNWIs) are now looking at different asset classes, one of them being the residential market in the US. They seek proven markets that offer transparency, low barriers to entry and a history of long-term stability.

“We are seeing a significant interest by Asian investors, as the US is at an advantage for having low barriers to entry. In the UK, the stamp duty is 15% for properties priced at £1.5 million or more, Canada (22%), Singapore (20% to 22%) and Hong Kong (30%). In the US, we do not impose a foreign buyer stamp duty tax; in fact, foreigners are treated just the same as domestic purchasers. This is a good time to consider the US, given the resilience [from the economic standpoint] and the steady historical data,” Jordan added.

The panellists proceeded to discuss US immigration in relation to purchasing real estate. “From a foreign investor’s perspective [especially Asian investors], some of the drivers are safety [as the US dollar is strong], value, work and frequent travels to the US, children’s education and personal connections with their families living in the US. After the 2009 financial crisis, we witnessed massive flows of funds [in real estate] from Asia,” said Jiang.

“Another key driver is the ex­empt­ion in estate duty of US$60,000 for foreign nationals when buying a US property. When foreigners purchase real estate in the US, they may also use the foreign blocker to avoid the duty in the US. There is no inheritance tax in the US.

“The US bank accounts, properties and anything sitting in the US trusts are not subject to FATCA or CRS; there is no income tax [on personal wealth] for foreign investors in the US,” explained Jiang.

Active despite disruptions

Despite the disruptions in the last 30 years, the US market, particularly in New York and Los Angeles, has remained active, according to the panellists.

Wachtfogel said, “The Manhattan and Los Angeles markets were doing well at the beginning of the year. Since then, the pricing [has become frothy because of inventory buildup] in Manhattan, then readjusted to pricing that’s agreeable to sellers and buyers. Sales in 4Q2019 and 1Q2020 increased by 10% y-o-y, while prices pulled back by 10% [from a high point in 2016].

“Throughout a 30-year period, prices either remained level or quickly recovered. As a result, we had strong market fundamentals in March 2020. Looking at the long-term performance of the Manhattan market, over the last 30 years, we had three notable market disruptions [dips were relatively short, while the recoveries were signifi­cant].

“After the 1990/91 recession, sales dipped in 1992 but then more than doubled in 1993, which started a 10-year growth period. And then we witnessed a minor dip in sales in 2001 (because of Sept 11) but sales rebounded in 2002, leading to exponential sales growth in the mid-2000s. The 2008 financial crisis affected sales in 2009 but it recovered in 2010 and kicked off an eight-year expansion for the sales market in New York.

“While the market is affected in 2020, it is important to note that it is not because of a decrease in demand, but rather due to a 90-day shutdown of in-person showings mandated by the state of New York. None of the previous market interruptions have had this kind of mandate, so this is supremely unique to the situation, and is the most stringent shutdown in the US, but it ended on June 22.

“Looking at our portfolio, we actually had more offers since June 22. This demonstrates that the demand has not subsided and, in fact, returned quite quickly once we passed the shutdown period. We foresee a quick market recovery [following an interruption] and will sustain significant sales growth after the blip.”

The rest of the panellists concurred that the New York market was expected to see a pickup in the short term.

Atkinson said: “This is demonstrated by the level of enquiries received in recent weeks for residences at The Towers of the Waldorf Astoria — from buyers across multiple markets in Asia looking to purchase a trophy asset investment opportunity in arguably the world’s safest real estate market. The full block property, which will include 375 condominium residences and the 375-key Waldorf Astoria New York hotel, will welcome residents and guests in 2022.

“The US is the No 1 destination for residential purchases of buyers from Asia-Pacific, as demonstrated by Knight Frank’s 2020 Wealth Report findings.”

She added that Asian investors who plan to purchase property in 2020 indicated a clear preference for prime residential markets, with the US leading as the destination of choice. 

Meanwhile, there has been activity in Los Angeles, particularly in West Hollywood. “In the last three months, we had three transactions in Beverly Hills and West Hollywood at about US$3,000 psf,” said Wachtfogel.

The panellists concurred that there had been an increased demand for better-quality develop­ments, especially in the super prime market.

“What we are seeing now is a ‘flight to quality’, where the very best residences — ones with uniquely desirable location factors, design and execution of exceptional quality, spectacular views and amenities, or preferably all of these factors — are the ones now entering contract,” said Williamson. “We find that people are drawn to more private outdoor spaces [which command] a premium, and we find that they gravitate towards smaller-sized, more private buildings.”