Living the American dream

The bulk of Middle East investments in the US property market has historically tended to be institutional or high-net worth individuals buying big ticket items and trophy assets.

However, a bloated inventory, unemployment concerns and foreclosed homes have readjusted price levels and transformed this market into an unusually attractive one for cash-rich small and medium overseas investors.

With residential lots available at $17,000 - $18,000 (Dh62,435 - Dh66,109) and condominiums in hotspots such as Florida listed at $50,000 (Dh183,635), investors now have immense scope to snap up bargains in one of the most mature housing markets in the world.

As per data published by the National Association of Realtors (NAR), US, investors from the Middle East and Africa (MEA) have increased their purchasing of US residential property from $1.10 billion to $2.64 billion between 2008-09 and 2009-10 — a staggering 140 per cent increase. Further, of the $66 billion invested in US residential real estate by foreign buyers in 2010, approximately $15 billion has been invested in Florida.

"There is a sharp increase in the number of Middle East investors buying properties in the US," says Omar Gani, CEO of Aquila Properties, a licensee of Fine and Country International Realty.

Property buying scheme

Keen to garner a slice of this lucrative market, Aquila Properties has launched USInvest, a scheme that facilitates Emiratis and expatriates to buy property at deeply discounted prices in the US.

After clinching deals worth $1 million during the test phase of USInvest in the UAE, Aquila Properties will now roll-out the programme in other GCC countries. The real estate firm is offering land lots starting from $13,500 (approximately Dh50,000) and condominiums priced from $60,000 (approximately Dh220,000) to GCC-based investors.

"There's not much you do with capital between $50,000 and $500,000. Local investors are too nervous to buy property in Dubai for this sum. Since the traditional markets of India and Pakistan are booming, it's a bit tricky to get into those markets. Europe is still a bit too expensive. But, here's an opportunity where you can buy property at a price level which it hasn't been in a generation. What alternatives do you have? Bank deposits give you low interest rates and mutual funds involve a different risk profile altogether. This is a safe bet as your property is in a country with strong laws, adequate regulation and your rights are protected," observes Gani.

Local partner

A collaborative on-ground arrangement with Jupiter Properties in Palm Coast, Florida has helped Aquila Properties get access to competitive deals in good locations. The soft launch of USInvest among Fine and Country's existing clientele in Dubai saw purchasers showing interest towards fully zoned land lots.

"Initially, everyone tends to gravitate towards rented property and yields. But, when we explain the benefits of buying land, they snap up land plots since the entry level is so low. About 75 per cent of our investors opted for land while the remaining chose condominiums. Currently, we have residential land and two developments in Orlando, close to Disneyland, for sale," says Gani.

USInvest primarily targets distressed sellers and, therefore, faces stiff pressure from home builders while acquiring residential land lots. Eschewing properties undergoing foreclosure proceedings, the scheme, instead laps up homes that have been foreclosed and acquired by the bank.

"There is a misconception that foreclosure is where the value is. Foreclosure is really hard to deal with as you are dealing with a delinquent borrower and a bank trying to take over the property from its customer. Because of our presence on-ground on Palm Coast, we deal in distressed properties and also with units owned by the bank after the process of foreclosure is complete," he adds.

Each lot marketed under USInvest is approximately 10,000 square feet, located in prime areas, fully-zoned, with complete civil approval in place and has no binding time limit to build.

Investors seeking capital appreciation tend to buy land lots and financing can be organised for multiple lot purchases. Condominiums, on the other hand, are located in a gated community, rented and managed and have low vacancy rates. Though financing is not available for purchase of condominiums, investors can be rest assured of capital appreciation and a steady rental income.

Buyers can expect a net annual rental yield of 7-7.5 per cent on these properties after deducting costs such as insurance, property taxes, management fees, service charges, etc.

Fine and Country performs due diligence on each property, which includes a soil test, title search to ensure no further investment is required for building approval, zoning permission, etc. "We provide whatever is necessary for our clients to buy, hold, service, maintain and to eventually sell the unit," assures Gani.

The soft US property market presents opportunities to both risk-tolerant investors seeking aggressive short-term returns and risk-averse small investors who want to preserve capital in the long-term and want a steadily growing asset.

"We have enquiries from high-risk players. But, USInvest is targeted at people with a low risk appetite who want capital preservation. High-risk players need to go for auctions with cash, pick up these properties, fit them out and earn 20-30 per cent return in a three-four month period, " Gani says, adding, "Fully developed, zoned and improved residential land lots, close to golf courses, water canals and the beach, can be bought for $2 per square foot. No wonder foreign investors have bought close to $15 billion of residential properties in Florida alone, with investors from the MEA region having invested close to $1 billion worth of properties in the last one year."

Supply-demand imbalance

Currently, the supply of new homes in the US market is around half a million units a year while the average annual demand for homes (courtesy population growth) is 1.3 million per year. This demand-supply imbalance, which is helping absorb the excess inventory in the past, coupled with better lending conditions will start to improve the pricing scenario of the market in the medium- to long-term. Therefore, it is opportune to buy now because the negative market conditions have re-adjusted prices to historically low levels.

As per NAR statistics, nationwide, median and average residential prices have come down by 15 per cent from the peak. However, the four states of Arizona, Nevada, California and Florida, which drove the boom with excessive amount of speculation and building, have seen residential prices decline by around 40 per cent.

"Because of our affiliation with Jupiter Properties, we can transact in any state in the US. Florida has always been the number one destination for overseas investment in US real estate. It's a very popular destination for holiday homes and investment, since the homeowner tax is low, the weather is good, thriving tourism, resorts, etc. Middle East and African investors have bought close to $900 million worth of properties in Florida in 2010," the property expert says.

In the US, a market's dynamics is generally gauged by the months of inventory available. Six months of inventory suggests the market is normal and a buyer-seller equilibrium exists.

As matters stand today, there is a 12-month inventory nationwide. "Orlando had a 22-month inventory one year ago and now has re-adjusted to a seven month inventory. However, Miami has not adjusted that well. Prices have bottomed out in Orlando and have seen a marginal rise over the past few months. I think the turnaround is around two to three years away."

The new pricing metric and low mortgage rates have also rendered attractive properties affordable for the average US working class person. "Interest rates have fallen to 4.3 per cent, which is the lowest seen in 50 years, and the government encourages first-time home buyers by giving them a credit of $8,000 towards purchase of a unit. One of the problems previously was that prices went so high that an average upper working class person couldn't qualify for a mortgage. But now, they can qualify and afford mortgage payments since they have stable jobs. In addition to that, the government has helped individuals facing foreclosure by cutting their interest rates to about 2 per cent," says Khalid Muneer, president, Jupiter Properties.

The process

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