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American multi-million dollar homes gain ground with Middle East’s ultra wealthy

By Joyce Rey, Executive Director, Coldwell Banker Previews International

November 2015

Let’s say you’ve got a few million dollars to invest. Where do you put your money? The usual suspects, of course: property, the stock market, bonds, mutual funds, and maybe even a promising business idea or two. But while stocks, bonds, funds, and business ideas are popular candidates, it’s real estate that takes home the fattest slice of the ultra wealthy individual’s investment portfolio – second and third homes are pretty commonplace with ultra high net worth individuals (UHNWI); 79% own at least two homes, and 53% own three or more[1].

The Middle East is of course home to more than its fair share of affluent individuals and families, and a good chunk of them are in the market for luxury residential properties to serve as additional homes, long-term revenue streams, and as part of programmes to gain citizenship or residency status in foreign nations.

Up until recently, London has been the prime candidate for investors from the region looking to pick up high-end properties – it’s investor friendly, it’s marked by posh locales and an alluring lifestyle, and, geographically speaking, it’s located at a relatively convenient distance from the Middle East.

But the region’s UHNWI are now veering away from London’s luxury realty, the chief culprit being its ballooning property prices: London’s ultra-prime market has seen a whopping 107% appreciation in prices since 2005[2]. Add to that the strengthening of the Pound Sterling and the inelastic supply of housing within the city, and the Middle East’s high-profile buyers are now willing to look a little further away from home.

Shifting buyer confidence

Unsurprisingly, rumblings from within the luxury realty circuit in the U.S. suggest an imminent surge in investments from the Middle East. Corroborating this is the fact that buyers from the region spent USD 5 billion during the first quarter of 2015, with the destinations for investment split equally between the U.S. and Europe[3].

The U.S. has always been a top contender for reasonably priced luxury property; it is a healthy market, with not as much volatility as seen in other places. That’s probably why New York, Los Angeles, San Francisco, and Washington D.C. all featured in the list of top ten cities for UHNWI to invest in last year[4] (New York being on the top spot; the city’s performance over the past year has been aided by the growing availability of high-quality new-build developments).

In the wake of the economic downturn in 2008, these cities came to epitomise safe-haven property markets for overseas buyers looking to escape currency, economic, political, and security crises by putting equity into tangible assets. These cities have since turned into some of the nation’s most competitive and sought-after housing markets. Incidentally, the luxury housing market in the U.S. was the first to recover after the crisis, and has been going strong ever since.

Foreign buyers are attracted to these markets as they present the opportunity to live in a world-class destination while investing in properties that offer a good return on investment and are smart vehicles for asset diversification. These markets also serve up just the right mix of premier location, great views, unique design, high-end finishes, impeccable services, and amenities.

Historically, UHNWI from the Middle East have bought office buildings and trophy hotels in New York, Los Angeles, and other ‘gateway markets’. But we’re now seeing an increase in private, non-institutional investors following in their footsteps and picking up luxury residential properties. To some extent this can also be attributed to Middle Eastern families sending their children to the U.S. for higher education; parents are apt to buy a property that is close to where their children are studying.

Buying an American luxury home

So as the number of wealthy individuals in the Middle East grows, the number investing in the U.S. also increases. For any investor, location is the most important factor: whichever city you choose, your property must be housed in a prime neighbourhood, in a prime location.

It’s also very important to hire a knowledgeable, experienced agent to guide you through the process – buying a home with a price tag of over USD 1 million can prove trickier than navigating the run-of-the-mill real estate market. Additionally, a qualified real estate agent may be your best bet for finding properties that are for sale but not necessarily listed publicly because of privacy concerns and may also have inside information about listings before they hit the open market.

There is not a lot of red tape when investing in high-end luxury properties in the U.S., as long as the investor in question has already transferred his or her money to the U.S. When a foreign investor purchases a property, there is no taxation levied on the buyer; the seller, however, does have to pay a transfer fee. If a foreign investor were to sell a property, a capital gains tax would be levied based on the money made on the property.

Today, in the U.S., international buyers represent a growing percentage of the real estate market. From April 2012 to March 2013, international transactions stood at USD 68.2 billion[5]. Los Angeles, in particular, has seen heavy international buyer activity over the last few years[6].

As the number of billionaires globally reach new heights, so too do the price benchmarks for their trophy homes, as the world’s most affluent focus increasingly on acquiring ‘collectable’ residential assets in prized locations across the globe. More properties were both sold and listed for sale at USD 100 million or higher in 2014 than ever before.

[1] Wealth-X: Real Estate Focus: Where The UHNWIs Buy

2 Savills: Billionaire Buyers Push Values of Ultra-Prime Homes Even Higher

3 Cityscape: Middle Eastern Investors to Spend USD 15 Bn in Global Real Estate Markets

4 Wealth-X: Top 10 Cities for Ultra High Net Worth Individuals\

5 National Association of Realtors: Summary of the 2013 Profile of International Buyers

6 Redfin Research Center: Sales of Million-Dollar-Plus Homes Growing, But Who’s Buying Is Shifting