International Intelligence

We live and do business in a global economy and borders are increasingly becoming bridges to economic growth, providing significant opportunities to enhance our capacity to succeed, particularly in an economically challenging cycle. While the weakening dollar has affected the buying power of U.S. residents, the condition has fueled increased foreign investment. Foreign businesses bought $11.3 billion of U.S. real estate in 2006, up 45% from a year earlier. While those numbers include commercial and industrial properties, conventional theory has it that foreign investors have also been stepping into a residential market niche once dominated by first time buyers. However, this may have been the case when the dollar was stronger than the euro (EUR), but at this time in our history, the upscale second home marketplace is increasingly becoming the beneficiary of the strengthening euro. At this juncture, a foreign buyer needs just EUR34,000 to make a $50,000 down payment on a home in the U.S. At the beginning of the year, that same buyer would have needed nearly EUR38,000 to make the same down payment.

Savvy overseas buyers are bullish on American real estate as they expect that the tide will surely turn, again, providing them with significant equity over time. These are not speculative buyers, but investor-users that have the propensity to trade up as values begin to rise. Foreign investment in vacation homes has traditionally focused on entertainment-rich markets such as New York City, Orlando, FL and Los Angeles, CA, but current buying activity is broadening to include secondary markets that heretofore have been considered relatively remote with respect to foreign investment. A recent article in the UK’s Sunday Express focuses on Asheville, NC and the growing interest in purchasing homes in upscale, gated communities where security and access to the great outdoors serve as strong demand generators. While ease of access; i.e., direct flights, tends to increase the popularity of a foreign investment opportunity, markets such as Asheville are seeing increased interest as foreign buyers assess a variety of local market conditions and focus on those that have not yet seen skyrocketing appreciation. The settling and stabilization of some of the more volatile markets is also garnering interest as this most recent chapter of the American real estate chronicle comes to a close and appreciation ascends once again. In Las Vegas, foreign money is helping to bail out areas that were overrun by short-term investors, effectively cleaning up the mess that speculator buying created. Many developers are taking the proverbial bull by the horns and directly targeting productive foreign markets. Corcoran Group now sends agents to 12 overseas investor shows a year including Dubai and Korea. Shelbourne Development Group hired UK real estate firm Savills to handle international sales of its Chicago Spire; and Lake Nona, an upscale private golf community near Orlando, originally developed by UK entertainment giant Sunley Holdings, has reportedly shifted 30% of its advertising budget overseas; five of 19 properties sold in the last six months have been to buyers from the U.K.

According to a survey conducted in May/June 2007 by the National Association of Realtors® (NAR), nearly one-third of REALTORS® reported that they had done business with international clients during the period April 2006 to April 2007, and 86% of them advised that those sales accounted for up to 25% of their business. Two regions and several states dominate the current scenario. The South attracts the largest proportion of foreign home purchases (49%) with Florida accounting for 26%. The West comes in with 31% of foreign buyers with California accounting for 16% followed by Texas with 10%. The Midwest’s share is 11% and the Northeast 9%. Arizona, New York, Colorado, Illinois, Ohio, Georgia and North Carolina also rank amongst the top ten.

Points of Origin and Interest – Buyers of U.S. residential real estate come from many parts of the world. While 33% of foreign buyers are from Europe, Asia accounts for 24%, North America (outside the U.S) accounts for 23%; and Latin America, 16%. Among individual countries, the largest share of foreign buyers (13%) comes from Mexico. The United Kingdom ranks second (12%), while Canada, India and China round out the top five countries of origin. Interestingly, Africa and Oceania, (largely comprising the Pacific islands of Micronesia, Melanesia and Polynesia, but is often defined to include Australia and New Zealand) account for a 2% share each. African investment is most often focused in the South while the West attracts the largest percentage of Asian and Oceania buyers. This clearly has to do with accessibility. Direct flights from London to Orlando have served to increase UK investment in Mickey’s backyard while accessibility to Miami has spurred investment from Latin America. While 46% of Canadian buyers gravitated to the South, 38% bought property in the West; 10% in the Midwest and 6% in the Northeast. Mexican buyers tend to purchase in the South (47%) and West (39%) but 13% purchase in the Midwest.

Investor Profile – Nearly one-half of foreign buyers purchase a U.S. home for use as a vacation retreat while 22% purchase a home for investment purposes. U.S. visa rules allow non-residents to remain in the country for six months. In this regard, 44% of foreign buyers intend to use their U.S. digs for one to six months per year, and 26% plan a stay of three to six months’ duration. Foreign buyers show a strong preference for condominium apartments. The success of the condo-hotel concept speaks to this desire for a maintenance-free, income producing investment. The median sales price associated with foreign buyers during the 2006 period analyzed was $299,500, markedly greater than the national median sales price of $221,900. Fourteen (14%) percent of foreign buyers paid more than $750,000 for their U.S. property and buyers from the U.K. and China paid the most – exhibiting a median price in the $337,500 range. That said, Canadian buyers were more likely to have purchased homes priced over $1.0 million. A greater proportion (28%) of foreign buyers paid cash for their purchase in comparison to all buyers of U.S. properties (8%).

Judith She, Real estate market analyst and Managing Editor of Bowden’s Market Barometer An “Insider” Newsletter Focusing on Trends in the Recreational and Resort Community Development Industry.