Balancing Real Estate Investment Risk and Reward: 2017’s Best Markets for ROI

Investors are always interested in securing investment opportunities featuring the ideal balance of risk and reward, and rightly so. In the real estate market, there are several still-emerging trends influencing where investors are most likely to find properties in which the potential return on investment greatly exceeds the potential risk associated with that investment. In 2017, at least in a general sense, the best and most balanced investment opportunities can be found in cities located in the southern half of the United States, with a few notable exceptions, of course.

Each of the following cities selected earned its placement on this list through an analysis of a number of factors most likely to be predictive of future value relative to the likelihood of investment risk. The cities are limited to those featuring a population density of at least 500,000 residents, with the future price forecast and current level of affordability representing the most heavily weighted of the various factors used in evaluating the best limited-risk, high-ROI real estate markets.

Dallas, Texas

Dallas tops the list of cities in which real estate investments feature a significant return on investment along with a minimal potential for risk, as the Texas city is currently underpriced by 3 percent relative to historical averages. In the past year alone, home prices have gone up by nearly 4 percent, but that rate is expected to accelerate rapidly over the next three years mostly due to gains in job growth as well as overall population growth. Based on these trends, home prices are expected to increase by 31 percent by 2020.

Jacksonville, Orlando, and West Palm Beach, Florida

The financial crisis hit Florida hard, but the state’s real estate market has proven to be among the most resilient in the country, as Jacksonville, Orlando, and West Palm Beach feature all the conditions necessary for yielding a significant return on investment that involves minimal risk. Consistent job growth throughout the state, combined with a renewed commitment to restraint among builders, has made several cities throughout the state among the most undervalued in the country, with some undervalued by as much as 20 percent in recent years.

Seattle, Washington

In Seattle, Washington, the Pacific Northwest real estate market features at least one city representing the ideal balance of investment risk and reward. At a price of more than $400,000 on average, Seattle’s average home price is the highest of the five cities listed here, but the expectation of a 26 percent increase will push home values over the $500,000 threshold by 2020, making the iconic Pacific Northwest city one of the most balanced investment opportunities for investors seeking to maximize ROI without courting any unnecessary risk.

Chinese Investors Continue to Invest Heavily in US Real Estate Market

Over the past few years, countless real estate industry headlines have focused on Chinese investors and their ongoing and genuinely staggering level of involvement in the commercial and residential real estate sectors. According to our own independent analyses, the past five years of data indicate Chinese investors are responsible for putting well over $100 billion into commercial and residential real estate properties throughout the United States.

While most of the attention has focused on the more high-profile efforts made by foreign investors to secure safe assets offshore — including, for example, the $2-billion sale of the Waldorf Astoria to the China-based insurance group Anbang as well as its failed attempt to secure the Starwood Group for a sum of $14 billion — a great deal of the activity taking place during the past five years reflects a high-volume effort inspired by a number of economic factors. It is these same economic factors that point to the likelihood that foreign investment will double over the course of the next five years.

The fall of the yuan is one of the primary motivating factors pushing Chinese investors into the US real estate market, as the projected stability of the US real estate market serves as a vehicle for wealth preservation in the face of growing concern regarding the yuan. With few limitations on foreign-based real estate purchases in the US, Chinese investors are essentially free to enter the real estate market, often with the goal of investing in a rental or resale property. Of course, many foreign investors also rely on a real estate investment as a vehicle for securing legal entry into the US via an EB-5 investor visa.

It’s worth noting that any analysis of Chinese activity in the US real estate market is quite likely to be underestimating the full extent of investment activity over the past five years. This is due to the simple fact that a large volume of foreign investments can be executed through front companies or trusts that are not necessarily subject to public disclosure. As a result, the historical data, as well as the predictive analyses based on that historical data, does not necessarily provide a comprehensive view of the sizable Chinese real estate investment activity in the US.

Although it is not possible to understand the complete extent of the investment activity undertaken by Chinese investors, it is clear that the activity is indeed substantial enough to have an impact on some of the nation’s largest and most expensive real estate markets. In fact, the bulk of the activity from investors based in China has focused on markets that include San Francisco, Miami, Chicago, Seattle, Los Angeles, and New York.

During the next five years, it is possible and perhaps even quite likely that Chinese real estate investments will account for a sum approaching $220 billion or more. While the bulk of that investment will likely be directed toward commercial properties, the residential real estate market in the US will also experience a continued rise in activity from foreign-based investors, with investors based out of China accounting for the majority of that activity.

With Increase in Home Deliveries, Lennar Corp. Exceeds First-Quarter Expectations

Lennar Corp. posted profit and sales numbers that greatly exceeded expectations for the first fiscal quarter, and it appears the homebuilder is currently poised to continue to outperform expectations in the second quarter after trending upward by almost 1 percent according to recent premarket trade analyses. Of course, it is worth noting that although the homebuilder’s quarterly net income fell compared to one year ago, it still exceeded the earning-per-share consensus and experienced an increase in revenue growth from $1.99 billion to $2.34 billion.

According to our own recent analyses, a renewed economy featuring the promise of sustained growth is part of the reason homebuilders like Lennar Corp. have been able to exceed performance expectations during the early part of 2017. Even though the supply of real estate is limited nationwide — in many cases requiring an increased reliance on off-market expertise — Lennar Corp. was still able to exceed expectations in homebuilding revenue and home deliveries.

In the case of homebuilding revenue, Lennar Corp. succeeded in generating $2.02 billion despite expectations indicating just $1.95 billion. As for the total number of home deliveries, Lennar Corp. again outperformed expectations, increasing home deliveries from 4,806 up to 5,433. In addition to the impact created by early indications pointing to a renewal in economic strength as well as sustained economic growth, the fact that Lennar Corp.’s home-buying incentives increased by $1,100 (up to $22,700 from last year’s average of $21,600) might have also factored into the homebuilder’s ability to outperform its first-quarter expectations.

The increase in the average incentives provided to homebuyers also paired with relatively static average home sales prices, with first-quarter analyses showing an average home sales price of $365,000. Even so, Lennar Corp.’s first-quarter performance is clearly the driving force behind the homebuilder’s stock price rising by 27 percent thus far this year. Lennar Corp.’s year-to-date stock spike of 27 percent compares with a 10 percent increase in the SPDR S&P Homebuilder exchange-traded fund and a 6 percent gain in the S&P 500 SPX.

As Lennar Corp. continues to exceed performance expectations while also outpacing both the SPDR S&P Homebuilder ETF and the S&P 500 SPX, it is fair to wonder whether the homebuilder will be able to sustain its impressive first-quarter performance numbers. Should Lennar Corp. succeed in doing so, it will be interesting to conduct an analysis that properly explores the role of all the different factors enabling the homebuilder to outperform expectations while increasing home deliveries and consistently generating greater homebuilding revenue.

 

References:

http://www.marketwatch.com/story/lennar-beats-profit-and-sales-expectations-as-home-deliveries-increase-2017-03-21?siteid=bnbh

https://seekingalpha.com/article/4056950-lennar-corps-len-ceo-stuart-miller-q1-2017-results-earnings-call-transcript

The Trump Effect on Commercial Real Estate

Donald Trump has won the US presidency in a shocking upset. News of his victory coursed through global stock markets, causing them to briefly tumble, though they stabilized quickly thereafter. While Trump came to power by exploiting a surge of populist sentiment, there are many open questions as to what the real estate mogul’s presidency will look like for businesses, and commercial real estate (CRE) in particular.

Major Planks in Trump’s Economic Platform

“Despite all the noise, Trump in my mind won on a promise of growth,” said John Kevill, Avison Young principal and managing director for U.S. Capital Markets. “His proposed infrastructure spending, plans for lower taxes, moving jobs back and a target of 4% growth all speak to that. If it appears that things are starting to happen in that regard, expect CRE investment to follow as yield will look to be relatively attractive.”

Trump has, among many other things, run on a platform of protectionism, wall-building, and economic growth. If he succeeds in bringing manufacturing back to America and follows through on his vow to construct a US-Mexico barrier, it could portend a greater volume of construction, including factories, warehouses, and commercial offices– particularly in the Rust Belt. Yet there are also the negative feedback effects of protectionism to consider. For instance, while manufacturers stand to gain from such policies, developers who source construction materials may face higher prices born of decreased competition.

Trump has also vowed to boost defense spending and invest $1 trillion in infrastructure, which also presages a construction boom. Accordingly, Caterpillar’s stock, following his victory, surged 7.7%. Increased government spending in such sectors will likely lead to an expanding portfolio of properties owned by the government.

“We will more than likely see a significant increase in spending on real estate by the General Services Administration (GSA), government contractors, consultants, and, of course, lobbyists,” said John Kevill, Avison Young principal.

And, with the House and Senate firmly under Republican control, some are predicting reduced political gridlock and dysfunction, paving the way for Trump to follow through on his promises to pare back corporate and individual taxes as well as to roll back Dodd-Frank regulations. This also augurs well for CRE. In particular, Trump has proposed taxing long-term capital gains on real estate ownership and investment at a maximum rate of 20%, judiciously capping business interest expense deductibility, and taxing carried interest as ordinary income.

Luxury Real Estate

Despite the outstanding uncertainty surrounding the nature of, and policies proponed by a Trump presidency, some are confident that, given Trump’s background, he will be a champion for the luxury real estate sector in the US and abroad.

Trump’s win “will bring a property industry leader into the White House for the first time in American history. Without a doubt a Trump presidency will be pro-property and pro-real estate,” said Peter Wetherell, a London-based real estate broker and CEO of Wetherell.

References:
http://www.costar.com/News/Article/Economists-CRE-Industry-Begin-to-Assess-%E2%80%98Trump-Effect-on-Property-Markets/186466?rpt=1

http://www.mansionglobal.com/articles/45393-donald-trump-presidency-may-prove-beneficial-to-luxury-real-estate-market-globally

http://www.forbes.com/sites/elyrazin/2016/11/10/trump-has-real-estate-in-his-blood-how-will-his-presidency-affect-the-real-estate-industry/2/#2bc337818cee

http://www.businessinsider.com/trump-election-president-housing-market-2016-11

Tempur Sealy Shares Plunge Following Lower 2016 Sales Guidance

Shares of Tempur Sealy International plummeted by 22% to $57.60 following the dismal sales guidance issued by the company, informing investors to expect a 1% to 3% decrease in net sales for 2016 compared to last year. Tempur Sealy also put its revised EBITDA at between $500 million and $525 million, down from the EBITDA guidance of $525 million to $550 million that it issued earlier this year in July.

“While our net sales are below expectations, our operational initiatives are going well and are continuing to drive considerable margin expansion,” Chief Executive Officer Scott Thompson said in a press release. “We currently expect net sales for the full year to be down 1 to 3 percent as compared to 2015.” Thompson, who was brought on board by activist investor H Partners Management LLC, has been aiming to cut costs and boost profit margins at the company in keeping with his mandate.

While Tempur Sealy has not been forthcoming with reasons for the decreased guidance, one likely culprit is the booming online market for mattress sales by e-retailers such as Casper and Tuft & Needle. These companies represent only $300 million, or 2% of the industry, but have captured 13% of non-innerspring mattress sales, and continue to increase market share rapidly.

Another factor put forth by The Wall Street Journal is that the rebranding efforts of Steinhoff International Holdings have had a detrimental effect on mattress sales. Steinhoff recently acquired Houston-based The Mattress Firm, the largest US specialty mattress retailer, and currently accounts for 25% of Tempur Sealy’s sales.

Tempur Sealy will release its third quarter results on October 27. According to USA Today, analysts surveyed by S&P’s Global Capital Intelligence forecast $834.5 million in revenue for the third quarter, down from $880 million in revenue that the company made during the same quarter in 2015. Analysts are also projecting $3.1 billion in revenue for the full year, down from $3.15 billion in revenue for 2015.

References:

http://www.marketwatch.com/story/tempur-sealy-shares-fall-as-2016-outlook-cut-2016-09-27?siteid=bnbh

http://www.usatoday.com/story/money/2016/09/28/tempur-sealy-stock/91213106/

http://www.cnbc.com/2016/09/28/tempur-sealy-shares-plunge-23-after-dismal-sales-guidance.html

http://www.wsj.com/articles/less-cash-in-the-mattress-at-tempur-sealy-1475084361

http://www.wsj.com/articles/steinhoff-to-buy-mattress-firm-for-2-4-billion-1470599217