Investment properties

The Dow Jones Index is tumbling. How can you invest your money in this time of governmental crisis? High US debts and the country’s credit rating downgrade are constraints to be taken into account. On the other side the European debt crisis is accelerating. Greece, Portugal and Ireland are small economies, but what will be the impact of more problems to come in Spain, Italy and possibly in France? The negotiations in Washington were an embarrassment for the US government and congress, but with the public sector accounting for only 35% of GDP this country is a tax haven and an administrative efficiency paradise compared with most European countries, where the public sector spends 50% of GDP or more (exceptions Switzerland around 40% as well as UK and Luxembourg about 45%). Sales taxes in the USA are mostly below 10% compared with the VAT in Europe around 20%. In addition, petrol and other energy costs in the USA are still less than one half of the European average. In other words, the USA is in better shape than the EU, and, in our view, the USD is likely to appreciate against the EUR eventually.

Most families owning a home know about the long-term investment value of residential real estate. Commercial real estate follows similar rules, but direct ownership is beyond the means of most families. This analysis will show an interesting way for an average investor to invest directly in a property type generating returns comparable to top commercial real estate.


Real Estate as an asset category

The global commercial real estate market is estimated to be as large as $23 trillion. Historically, commercial real estate has provided competitive returns and diversification opportunities for traditional portfolios. The vast majority is owned by institutional investors and indirectly by their shareholders or beneficiaries. Many investors prefer indirect investments, because they are more liquid, and the non-diversified risk can be managed easily. However, other investors would like to be direct owners of the real estate and make their own investment decisions on a case-by-case basis. So without tying up too much of his funds, how can an average investor become involved in quality income producing real estate following similar rules as large commercial properties?

First let’s look at the mechanics of the commercial real estate markets. Commercial real estate may be segmented by property type, geographic location and development stage. Core property types commonly include multifamily residential (apartment buildings), retail, office and industrial. Other, less common property types include health care facilities, public storage buildings, golf courses and hotels. Development stages include mature, income-producing properties, value-added, income-producing properties with appreciation potential and opportunistic or distressed properties with a focus on capital appreciation.

Long-term returns for real estate are driven primarily by a property’s net operating income (NOI) and to a lesser extent by property value appreciation. Historically, commercial real estate prices and income have grown on par with to slightly above inflation assuming properties are maintained appropriately. Income-oriented properties may increase rents to compensate for inflation’s erosion of value, and thus obtain some hedge against inflation. 


High-income properties in the USA

The US commercial real estate market has become internationally more attractive. We follow it continuously. Allianz Real Estate just published that it will enter into a joint venture with a US institution and a Canadian pension fund investing $200 million in multifamily housing in Boston and Washington DC. What is good for the big boys should be a guideline for us. Our specialty is finding attractive investment opportunities for private investors ranging in size from $400,000 to $2,000,000.

Historically, second homes have been a popular investment for private buyers. Second homes in Switzerland used to generate good returns, but in the meantime they have become too expensive due to a high demand and the high value of the CHF. On an international level and taking into account the current favorable exchange rate real estate prices in the USA are very low and mostly still declining as a result of the last financial crisis. There are exceptions, tough; and investors should carefully look at them.


High-income Properties - Anna Maria Island

Anna Maria Island (AMI) is the most important exception we found in Florida. More than 50% of all investments in the USA by foreign nationals go to Florida. AMI’s hotels and vacation rental houses are consistently full and have been full throughout the financial crisis. We refer to the article ‘Antidote to Recession’ published in the Sarasota Herald Tribune on April 18, 2011. Of course, real estate prices have gone down, too, during the crisis, but due to a strong demand for vacation rentals rental rates have gone up. In addition, this is an island enjoying uniquely low property taxes on rental units. The three cities on the island charge lower property taxes to enable owners to generate attractive returns. The taxes are about one half of regular property taxes elsewhere in Florida. The state, the county and the cities still take in more money through tourism and higher sales taxes including also on rental income (totaling 11.5%), which is charged to the tenants. The rental market has accepted this solution, and owners of a typical house generate a gross return of about 10% and an NOI of about 7% to 9%.

Properties on Anna Maria Island are great investments with lucrative annual returns. Most of the properties were built to produce rental income as vacation homes. If you are interested in a profitable investment, have a look at some examples:

buy a home by NMB Florida Real Estate LLC buy a home by NMB Florida Real Estate LLC  

The NOI of these rental villas for sale on AMI is between 7% and 9.11%. This compares with 7% for shopping centers featuring a first class anchor tenant and low vacancies and 7% to 8% for traditional multifamily housing. The short-term vacation rental market is more risky according to some analysts. Therefore, it commands a higher NOI. However, according to a leading rental company on AMI the vacation rental market on the island has proven very resistant to recession. Rental rates consistently increased during the last financial crisis. The average American family has only two weeks of vacation a year compared to up to six weeks in Europe. European tourists have demonstrated that they may reduce their vacation budget, but they will not abolish vacations altogether or even reduce their vacation time. In the USA this attitude is even more pronounced, since the vacation time is shorter. People may shift from expensive hotels to rental villas, they may spend less money in restaurants, but the families in the target market of AMI will not stop going on vacation all together.

A NOI of 9.11% is very attractive. With a conservative 50% mortgage @ 5% the return on equity invested may reach almost 15%.


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