Is there really a difference to be found in investment value among prime first-tier gateways?
Is there really a difference to be found in investment value among prime first-tier gateways?
When deciding between gateway investments, there are factors beyond price that can tip the scales, and despite what Sydneysiders may claim, at the first tier variations are modest at best. With COVID-19 bringing markets to a screeching halt in March, the direction they'll take when the crisis is resolved is yet to be determined, but some factors are implacable.
Australia
There's no argument that Australia's first-tier gateways are Sydney and Melbourne. Sydney is viewed as the beating heart of international business, while Melbourne is more lifestyle-forward. Both have respectable transit infrastructure and excellent schools; Sydney has Bondi Beach and Melbourne has the Australian Open.
Data investors consider includes financing, price and purchase cost, and New South Wales and Victoria both charge foreign purchaser duties of 8%. But mortgage rates are at record lows in both cities and both have experienced modest rebounds from downturns in late 2017. Investors will note that Sydney's property prices have undergone a “Steeper drop over the past two years than Melbourne, before the market [turned] around recently,” says RE/MAX All Stars partner Samson Cheung. “Rental demand is higher and vacancy rates are lower in Sydney given the higher property prices.” Sydney's place as Australia's economic engine and limited new supply will underpin its high prices, so anyone looking for capital gains will stay in NSW.
That said, Melbourne's lower home price to income ratio makes homes more affordable and therefore more appealing to all buyers. Melbourne's western suburbs are gaining traction because of prices significantly lower than in the city, but populations and economic development are growing rapidly, which is expected to lead to strong rental demand.
Canada
Toronto and Vancouver's foreign buyer levies are one of the major drawbacks to purchases in either of these Canadian cities: they currently sit at 15% and 20%, and the taxes apply to a number of surrounding municipalities. Opting for Surrey or Hamilton won't get buyers off the hook. Wedged between mountains and ocean, Vancouver is certainly the more scenic and outdoorsy, but those more comfortable in an urban environment will head for Toronto's steely cityscape.
Though the 2016 duties had an immediate effect on transactions, buyers returned to both locations because of the quality of life, progressive societies, low interest rates, and steady price growth. Canada's economic centre has traditionally been Toronto, but the recent shift is making Vancouver a viable option for business too. Excellent schools exist in both, though Vancouver is much closer to Hong Kong.
“The [Vancouver] economy is booming and has been the driving force of Canada's economy. If it can continue, its long-term prospects are very bright and home prices will continue to grow sustainably,” theorises Cheung, adding, “The price that you have to pay for a property versus the rent that you're going to get from it is better in Toronto. This is an important ratio for most investors as this directly affects your rental yield.” Toronto's high immigration rates keep the rental sector healthy.
The UK
In reality, the United Kingdom's only true first-tier city is London, though in recent years Manchester has thrown its hat into that elite ring. There's little that needs to be said about London that hasn't been already: a global capital of art, culture, industry and education, where demand perpetually outpaces supply; a true world city that's also flirting with a new foreign buyer stamp duty. Hong Kong has a historical connection to the UK, but London is the single location that embodies that. And London is not easily knocked off its game. Prices started correcting in 2014, and at the end of the 2019 “The market was beginning to strengthen. There were small levels of price growth in greater London and I think this is the trend to bear in mind, irrespective of everything happening in the short term,” states Tom Bill, head of London residential research for Knight Frank.
Though rents were increasing in London, yields are not, and Manchester recommends itself for its ongoing infrastructure development, urban regeneration, lower cost of living, student retention, youthful labour force and corporate relocation — including ITV, BBC, Barclays, and HSBC, which estimates average rental yields at nearly 8%. It may not be as glamorous as the capital, but it has room to grow and makes good investment sense.
The US
Right now, the United States is ground zero for the COVID crisis, and the current Trump administration has taken some of the sheen off investing in the country. Regardless of that, gateways New York and San Francisco are markets unto themselves, and are likely to weather the storm.
San Francisco has few strikes against it, and can easily vie with New York's economic status for investor attention. The unofficial capital of the tech world, San Francisco is home to some of the most expensive real estate on the globe. It's up there with Manhattan for cost, and as such low rental yields make them poor investments. “Nearby cities and counties within the greater metropolitan area offer a better investment case at this point,” argues Cheung.
In its favour, the San Francisco Bay Area is rich with new developments, and Manhattan's relatively weak price performance has been a drag on the market there. Additionally, California cities are the fastest American cities to recover following downturns. “This was illustrated in the post-2008 GFC era,” Cheung points out. “So if you take into account a long-term view of the market, when the economy enters recession, California's cities tend to retain and regain their value and rent performance soonest.”
Of course, New York is New York, one of the world's engines, and its “weak” market is relative. Yields in New York are generally low — 3% is good — but vacancy rates are also low. Investors are all but guaranteed tenants, and the majority of those are long-term thanks to the high relocation costs.