Last month I travelled coast to coast across the US through Los Angeles, San Diego, Austin, Dallas, and finally New York. Accompanied by my colleagues, Sean Fleming and Chris Pak, the trip was a valuable opportunity to connect with both existing and prospective members of EG’s Private Wealth investor community.
Whilst abroad, the three of us observed several interesting things about the current state of the US property markets. Comparing our findings with what we’re seeing in Australia, I couldn’t help but reflect on the saying “be greedy while others are fearful, and fearful while others are greedy”. Of course, greed rarely results in long term success, but there’s a lot to be said about seizing the right opportunity at the right time.
One of the major developments I noted was the City of Los Angeles’ approval of the ULA Tax or Mansion Tax. This tax imposes an additional real assets transfer tax of 5% on assets valued at greater than USD $10 million. This development is likely to drive wealthy Californians to more tax-friendly states like Texas and Florida.
Much like in Australia, US construction costs have increased. Whilst costs like timber have returned from meteoric levels back to normal, other costs remain high. For example, undocumented workers on construction sites have seen their day rates increase from $100 per day pre pandemic to $250 post.
Although the Federal Reserve is raising rates, the impact on the US market is less severe than the Reserve Bank of Australia’s increases. This is because 91% of residential mortgages in the US are 30-year fixed. By contrast, Australian homeowners will be deeply affected as some 800,000 loans revert to variable rates in July this year from their low near 2% fixed loans.
People were openly discussing concerns around the impending recession. Crime has also increased, with many cities reducing their police force.
The return to the office has been slow with employers struggling to motivate staff to revert to pre-pandemic working arrangements. That said, I think the balance of power is shifting back to employers, who are now expecting their teams to be back in the office. This trend includes the likes of Google which is now insisting on minimum three office days a week.
Whilst the focus of our trip was raising capital for inbound investment into Australia, we were presented with a number of US opportunities. Many of the deals presented were negatively geared, and investment managers are assuming that rental growth will outstrip the increase in rates. However, this assumption may be challenged if a recession does occur.
There is a lot of money sitting on the sidelines as we wait to find out when interest rates will finally plateau. Australia still represents good value as an alternative for US investors seeking diversification and stability in the growing AsiaPac market.
While investors should be cautious, challenging markets present opportunities.
If you are cashed up coming into this year, it could be time to seize opportunity whilst others are fearful.
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EG grows the wealth of our wholesale investors through commercial property syndication opportunities. Our Private Wealth division is led by Rodney Walt and utilises EG’s proprietary risk management software, PRISMS®, to pinpoint commercial investment opportunities across Australia. With capital security and stable income cashflows, EG takes a personalised and aligned approach to every opportunity.