Why invest in New York City real estate?

The New York City real estate offers many attractive features but also presents a number challenges. Confido Properties help its clients efficiently and safely realize acquisitions in this complex environment and help them realize the full potential of their investment.

The opportunity

We find that our clients invest for a variety of reasons, starting with a number of financial considerations:

Yield: as compared to many other major urban centers, the New York real estate market offers fairly strong yields. In Manhattan, an attractive acquisition can offer 3-5% gross yield, before taking into account the benefits of leverage and taxation. In addition, the market displays very low vacancy rates (<3%).
Resilience: the market has shown very strong resilience over the past cycle and was able to absorb a series of major shocks and crises including the 2000 Tech bubble, the September 11th terrorist attacks and the recent financial crises. Market prices are about to exceed their pre-crisis levels.
Appreciation potential: despite the elevated prices, many factors suggest a strong appreciation potential going forward and New York remains fairly affordable as compared to other major capitals of the world such as London or Hong Kong. Typical prices for high-end residential properties range from $1,500-2,000 / per square foot (i.e., $16-22K / square meter or 12-16K Euros per square meter). Unique properties or new developments can reach higher price points.
Historically low financing costs: despite the recent rate rally, financing costs are at historically low levels (e.g., ~4.5% for a 30-year fixed, fully amortized jumbo loan), which means in turn that investors can lock the value of very attractive financing terms for the next 30 years …
Tax benefits: investing in real estate presents a range of tax benefits as property acquisition costs can be amortized and offer tax deferral benefits. With the right legal set up, Non-US investors can also transfer real estate assets to their children without being subject to US inheritance taxes.
Inflation protection: real estate investments tend to be protected from inflation over the long run, an interesting feature for those who fear that a strong inflationary environment will unfold after an unprecedented amount of monetary liquidity has been injected in the financial system.
Currency hedge: the dollar still offers an attractive exchange rate vs. most developed economies currencies such as the Euro or the British pound. A real estate investment in the US market offers a natural hedge against exchange rate fluctuations and quasi-certainty that the value of the investment will be preserved in “real terms” (even if the $ were to drop vs. other currencies the investment can still be liquidated and the $ redeployed locally).
Liquidity: the New York real estate market tend to be highly liquid and attractive properties do not typically stay on the market for long periods of time. Even though banks have tightened their underwriting standards after the crisis, they tend to lend against real estate assets at fairly attractive conditions (up to 80% financing) reflecting their general view that the market is safe and liquid.

The challenges

While potentially attractive, the acquisition of a property in New York can be a very challenging and tedious endeavor.

Property due diligence: Each project requires a detailed, in-depth analysis of the situation; more than any other markets, the New York market has many pitfalls that can affect the value of a property by a significant degree: legal status of the building (e.g., condo vs. coop, A.I.R. buildings, existence of a Certificate of Occupancy), financial health of the property, ”Air Rights” of the adjacent buildings, building bylaws, zoning, landmark commission issues, “financiability” of the building, etc
Financing, tax & legal set up: Financing the asset and setting up the appropriate legal/tax structure are oftentimes issues for non-US residents, as they tend to struggle to find the right set of banking/tax/accounting partners, lack credit history, and have a limited degree of familiarity with the range of mortgage products available on the market (e.g., conforming vs. jumbo, interest only vs. fully amortized, mortgage assignment procedures). These issues can for most part be efficiency resolved with experience and the right set of attorneys, bankers, tax advisors and accountants.
Fragmentation of deal partners: beyond bankers, attorneys, tax advisors and accountants, finding the right set of partners for more complex projects such as architects, contractors, designers, building management companies, expediters is difficult, time consuming and costly – a network of tried and tested deal partners can generate very meaningful time and cost savings.
Confidentiality: confidentiality is also an issue for many foreign buyers as most of the information related to a deal is made public by the State through a range of publicly accessible databases: for instance, the value of a transaction, financing structure and property taxes are all available to anyone who wants to find out. A range of techniques can be applied to largely improve the privacy of an acquisition.
Construction: renovating or rebuilding a property can be a complex exercise, where most buyers tend to suffer from delays, budget overspend and execution headaches. Typical pain points include: finding, selecting, negotiating with and managing an architect, expediter, design firm and one or several contractors/sub-contractors, obtaining permits with the Department of Buildings and/or the Landmark Commission, coordinating with the building Board, superintendant, and at times with the State and City authorities, and finding the relevant suppliers and vendors (e.g., security firms, post construction professional cleaning).
Asset & lifecycle management: after a property has been acquired, the asset has to be managed, which can become a full time activity on its own (e.g., selecting and negotiating a building management firm, screening tenants and collecting payments, managing litigation, etc), further complicated by the constantly evolving nature of the environment (e.g., zoning changes, new developments, federal/state standards) triggering the need for an ongoing reassessment of the investment plan (e.g., need for additional capital expenditure to enhance the asset, ensure compliance with new laws/standards, explore exit or opportunities in adjacent buildings, etc).