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The British Invasion

February 1, 2013

Florida has long been a prime spot for British buyers looking to escape their chilly winters. But now snowbirds aren’t the only Brits buying in the states. Lately a growing base of buyers has emerged interested in the potentially good returns of investment property. In fact, NAR’s most recent Profile of International Home Buying Activity found that among international buyers of U.S. property, the U.K. ranked fourth, tied with India.

Past issues of Global Perspectives have examined cross-border transactions originating from other countries including China and India. What makes the U.K. different is that middle-class and first-time buyers are also jumping into the game. They see investing in the U.S. market as a way of amassing funds to move up the property ladder in Great Britain.

Housing stuck in a rut

The U.K. and European Union have suffered economically for several years and are now experiencing a double-dip recession. Property prices in Great Britain peaked in late-2007 then plummeted, finally beginning to rise slightly in 2010 and 2011. Then in the first half of 2012, average values dropped 2 percent.

With its prime properties, London has been the engine of growth for national price averages. Remove London from the equation and the rest of the country shows a bumpy decline, after adjusting for inflation. Recently even London has taken a hit, with July 2012 month-to-month average prices falling 3.6 percent.

The U.K. is a buyers’ market, but the buyers just aren’t there. Even with mortgage rates hovering between four and five percent on 80 percent loan-to-value mortgages, few buyers are stepping forward.

Buyers caught in the middle

First-time buyers and the middle class are feeling closed out of the market. Renters have found it difficult to save enough for the 20 percent deposit required by most lenders. A recent survey conducted by rental website Spareroom.com found that over 40 percent of renters say they cannot afford to save for a deposit. Those who can save report average savings of about £12,125, just seven percent of the average U.K. purchase price of £165,738.

Many first-timers who work in London have decided that the only way to make it to the first rung of the property ladder is to give up on the city. The south-east of London, historically not a popular spot, is gaining traction. Some buyers are moving to less expensive cities in neighboring Kent, Berkshire and Surrey counties, spending more time and money on commuting.

Middle-class homeowners who planned to move up to better housing are also frustrated. Many who were relying on their home’s appreciation to help them jump to the next level find their equity decimated. There are few good options for investments expected to yield a generous return to make up for the slack.

Sights turn to global opportunities

Many younger Brits have grown tired of waiting. “Even if they can’t afford to buy in the U.K., they’re moving ahead and buying property elsewhere,” says Pat Tan, CIPS, GRI, of Your Global Agents team at Coldwell Banker in Sarasota, Florida. “There’s tremendous pent-up demand in this market, and it’s finding its way to other countries.”

Young British investors have decided to invest in properties they never plan to live in. Tan reports that about one third of her sales to U.K. buyers are now purely for investment. They’re searching the global market for rental and investment properties that are affordable, a good value and will appreciate.

“The middle class in the U.K. tends to be quite savvy financially and internationally well-traveled,” finds John Mike, CIPS, CRS, GRI, of RE/MAX Prestige Realty in West Palm Beach, Florida. “They’re not daunted by the complexities and risks of investing in global real estate.” He reports that in the last few years they have been buying in France, Spain, the Bahamas, Italy and have become a growing presence in the U.S. beyond Florida.

What new U.K. buyers look for

Given their savings situation, these new international investors are interested in affordable condominiums, townhouses and in some places single-family homes with good yields and expectations of appreciation in the mid-term. They prefer properties that have depreciated significantly in the economic downturn, yet are in stable markets with low vacancy rates and good yields.

Income-producing properties in the U.K., called buy-to-let, tend to be expensive. They have high carrying costs and mediocre yields that leave little return after borrowing costs. Yields and prices improve outside of major metro areas, but vacancy rates rise due to high unemployment. For a small investor, there’s little prospect for either moderate income or growth.

Certain parts of the U.S. market can give them both. Mike says he’s seen interest in markets across the U.S. “Chicago, Indianapolis, Denver, Minneapolis—if you’ve got an affordable investment property that will generate a good return, don’t hesitate to bring it to their attention.” He adds that good property management is a must since the buyer is so far away.

Niche markets

Some Brits are interested in very specific types of properties, not ones that will necessarily appreciate greatly but will provide a steady stream of reliable income. Mike knows of a middle-class Brit who came into an inheritance which he wanted to put to work in the U.S. Every six months or so he buys a Section 8 property. They are inexpensive compared to other rental investments, have low carrying costs, have a government guarantee covering part of the rent, and low vacancy rates due to the long list of renters waiting for openings.

Savvy U.K. buyers with more capital are buying shopping centers and apartment buildings in areas with good prospects for market turnaround. “This type of buyer really crunches the numbers, so you have to be very knowledgeable about carrying costs, potential tax issues, comps and expected returns,” says Mike. “They are particularly keen on top-notch property management.”

Worldwide competition

Young British investors are adventurous and willing to put their sterling in many places beyond Europe and the U.S., like South Africa, South America and the Middle East. American agents should understand that they are competing internationally for the interest of U.K. buyers. It’s good to find out where else your British buyers are looking. Most typically, it’s in the euro zone:

Spain has been attracting British buyers for many years, but the recession changed that. Though average property prices are down over 30 percent from late-2007 peaks, Spain is burdened with a massive oversupply of housing. The unemployment rate hovers near 25 percent and is highest among young workers, who are most likely to rent. Even as the Spanish government considers incentives to attract foreign buyers while prices continue to drop, investors are staying away.

France has also been a favorite. Approximately 200,000 Brits own property there. Housing prices have not weakened as they have throughout the rest of Europe, but pundits expect the market to correct itself in the near future. France’s new President, Francois Hollande, has proposed measures that would almost double rental income and capital gains taxes on foreign-owned property. If passed, foreign buyers’ interest in France may dampen significantly.

Italy and Greece, also popular with Brits, are plagued with debt problems and high unemployment, hence are much less attractive places to park nest egg money.

Differences in carrying costs

Though closing fees (called completion fees) in the U.K. and the U.S. are similar at three to five percent of purchase price, ongoing costs of ownership and maintenance tend to be much higher in the U.S. British land owners pay a council tax, similar to property tax in the U.S., for local services. In 2011, the average levy for a property was £1,196.

Since property taxes vary so much across the U.S., a British buyer may be pleasantly—or unpleasantly—surprised. Property insurance can be steep as well, especially in areas where severe weather poses potential threats. Since U.S. homes and yards tend to be larger than those in the U.K., maintenance fees are another factor U.K. clients will want to consider when calculating carry costs.

Beyond buy-to-let

There is still substantial interest in the U.S. market from Brits planning to live in their overseas properties, despite the 180-day stay limit.

Vacation homes are currently a bargain in Florida, California, Arizona and Nevada. One property search website reports that Georgia is getting a lot of page visits from viewers in the U.K. Because of the limit on visits, many buyers look for homes that can be rented the rest of the year.

Prime and luxury properties are always in high demand by those with the means. The average price for a prime property across the U.K is about £480,000, or roughly $750,000. For a prime property in London, the average is £1.34M, or slightly over $2M.

“Business executives and investors love the U.S. west, and are buying prime residences in Dallas, Los Angeles and Las Vegas,” says Mike. “Of course Manhattan is the most desirable city on the east coast, and Chicago is popular for those considering the Midwest.” Mike adds that U.K. buyers are genuinely impressed by how much they can get for their money in big U.S. cities compared to other world-class locations. Whatever the city, direct flights to London are a must.

For the investor class, gated golf communities are another big draw as holiday homes. Members of exclusive golf clubs in the U.K. will cluster in similar golf communities here, where they can play with members of their clubs from back home.

Tapping into U.K. buyers

Not surprisingly, reaching the middle class versus wealthy investors requires different tactics. Tan finds advertising in The Sunday Times to be effective with entry-level and middle-class buyers. “The trick is to be consistent,” says Tan. “By repeating your ads you’ll become a familiar name to readers who scan the classifieds weekly. Repetition gives you credibility.” She also recommends running seminars at consumer-geared property expos like A Place in the Sun.

Brits who have actively invested in property in the past tend to have established relationships with estate agents (real estate agents) and solicitors (lawyers) who have previously assisted them. “At the upper end of the market, networking with highly-regarded London agents is crucial,” reports Mike. “There’s a tremendous amount of capital available in a global financial center like London. Trade missions are a good way to gain an introduction.” From there he advises networking into trade-specific events and meetings in private clubs and attending estate agent association events.

The good news is that more U.K. buyers are aware of opportunities in the U.S. market than ever before.

Buyers in all segments will want to establish relationships with agents who are knowledgeable, ethical and will protect their interests throughout the process. It’s entirely possible that your market contains the kinds of properties they’re looking for.


Reaching U.K. consumers

A Place in the Sun Live is a U.K.-based expo targeting British residents who are interested in purchasing overseas properties.

Where: London or Birmingham, U.K.

When: Held every spring and autumn; next event spring 2013.

More information at aplaceinthesun.com

 
OPPLive and The Property Investor Show is a U.K.-based conference and expo targeting international property professionals who wish to expand their network globally.

Where: London, U.K.

When: Held every October

More information at opp-connect.com, click on OPPLive in the top navigation bar.

 

The National Association of Estate Agents, which has recently merged with the Association of International Property Professionals, is a bilateral partner of NAR. Find more information and find estate agents at naea.co.uk/ or aipp.org.uk/.


Choosing where to buy or let

Cities with the lowest prices aren’t necessarily the best places to invest. Look for markets where:

  • Prices are rising
  • Employment is growing and unemployment is below the national average of 8.2 percent
  • Mortgage delinquency rates are low
  • Vacancy rates are low

Pittsburgh is a good example. Property has appreciated an average 3.3 percent in the last three years. Employment has grown 1.2 percent in the last year and the unemployment rate in June 2012 was 7.0 percent. The 90-day delinquency rate in 2011 was 4.7 percent, compared to 6.9 percent nationally. In the fourth quarter of 2011, Pittsburgh’s 2.2 percent vacancy rate was among the lowest in the country. Other good rental investment markets are Austin, Texas; Denver, Colorado; and Bismarck, North Dakota.


Where are Global Buyers Searching?

Realtor.com® recently released data regarding the top countries (outside the U.S.) where consumers are most engaged on Realtor.com® and Realtor.com® International. The data highlights the markets within the U.S. that are most popular amongst these global consumers.

The five top markets for U.K. visitors were Los Angeles, Orlando, Las Vegas, New York and Miami.

To see top searches originating from 20 different countries, go to realtor.org/articles/where-are-global-buyers-searching-in-the-united-states.

Source: Omniture Discover