Bargain hunters set sights on US property

PUBLISHED : Sunday, 14 September, 2008, 12:00am
UPDATED : Sunday, 14 September, 2008, 12:00am

Some opportunists think the time is right

It may call for an iron stomach and nerves of steel, but some local property buyers are starting to eye the battered US housing market.

Tim Murphy, managing director of IP Global, a Hong Kong-based property investment firm, probably ranks as one of the most aggressive among opportunistic investors on the prowl for deep discounts.

Mr Murphy is in the United States scouting prospective acquisitions in preparation for the company's soon-to-be-launched 'US subprime' deal - a basket of bargain properties pre-packaged for individual investors.

'I think now is definitely the right time to start looking,' said Mr Murphy. 'There are some amazing deals, and we have seen properties 30 to 50 per cent off their peak.'

There are good reasons for the discounts: the number of homes under foreclosure in the US has more than quadrupled in the past two years to 739,714 as of June, according to RealtyTrac. Demand for homes has slumped as buyers have stayed away from the market amid fears of job losses and tightened lending policies at banks. This has led to a swelling supply of foreclosed properties and heavily discounted, unsold new homes, which in turn has pushed prices down even further.

From a macro standpoint, things still appear stuck in a downward spiral, but Mr Murphy says some markets are already looking as if they might bounce back.

'The rental market is picking up because people domestically are not buying,' he said. 'I think investors and cash-rich Americans will chase the market back up in the next two years, so now is the time.'

However, Mr Murphy is probably in the minority among professional money managers in casting a vote of confidence in the US market. The majority warn that things could get worse before they get better.

'The US is in an environment similar to Japan in the early 1990s. The value of many properties needs to come down very significantly,' said Orient Property Group founder Adam Fisher.

Mr Fisher came to Hong Kong two years ago to establish the Orient Property Group and to focus on real estate in China and elsewhere in Asia after he could not find any opportunities in the US.

'We believe prices for many real estate assets [in the US] may take 15 years to recover on an inflation- adjusted basis,' he said. 'It will be a long recovery.'

Moreover, banks in the US might need to sell more assets to improve their balance sheets, which would push prices down even further, Mr Fisher said.

Since their peak in 2006, US house prices have fallen by nearly 20 per cent, according to analysts' estimates. The price drops have been most severe in California, Arizona, Nevada and Florida - all states that saw a rapid surge in prices during the housing boom.

In the luxury market, homeowners are reported to have slashed list prices by millions of dollars in recent months.

Housing inventories are reaching near-record highs as sales plunge to 10-year lows. Across the US, 4.67 million previously occupied homes were listed for sale at the end of July, according to the National Association of Realtors. At the current sales rate, that is enough to last about 11 months, analysts estimate. Supply and demand in the housing market are considered roughly in balance when the inventory is enough to last about six months.

As a result of the market slowdown, US property agents are diversifying their target base to include overseas buyers. For example, California-based Decker Bullock Sotheby's International Realty this month reportedly organised a five-day tour of 20 unsold properties in the San Francisco Bay area. More than 100 potential buyers from the US, Britain, France, Switzerland, Taiwan and Macau attended parties, the opera and symphony performances as part of the event.

Mr Murphy said many of his clients were looking for deals priced between US$200,000 and US$500,000, with good financing.

Real estate consultant Nicholas Brooke, chairman of Professional Property Services Group, said some of his clients with fatter wallets were positioning themselves, but not yet investing.

'A modest amount - US$50 million to US$100 million - in commercial investment properties is their target,' he said.

However, Mr Brooke cautioned investors against rushing in at the moment.

'I think it is probably still a little too early to make any investment, although those who are opportunistic should be positioning themselves for acquisitions in six to 12 months,' he said.

His view was echoed by Goodwin Gaw, chairman of Hong Kong-based private equity fund, Gateway Capital.

'I think prices need to go down further for opportunities to become interesting. And the opportunities for real estate purchases will be another 12 to 18 months.'

Still, when the right time does arrive, what should investors buy?

'Los Angeles is excellent because prices there are cheap and it has virtually no supply,' said Mr Murphy.

But he warned about potential oversupplies in Florida.

Going cheap

According to analysts, US house prices have fallen from their 2006 peak by: 20%