Tuesday, October 20, 2009

Reasons to Buy Manhattan Real Estate, published in TheStreet.com


Manhattan residential real estate has performed better than that of the US and comparable major cities such as San Francisco and Los Angeles.

For potential buyers including those who are recently married, having an expanding family or the investor who is looking for a hedge against the coming inflation, now is the time to shop. We are in an uncertain period where the Dow is at 10,000 without justifying fundamentals. Unemployment is at 10 percent, dollar is weak and inflation is coming. Relative to the stock market and comparable major cities, Manhattan has performed well. Here are reasons why and why it should continue to do well in the next 10 years.

The Numbers:
While cities like LA and San Francisco have declined more than 40 percent relative to peak, Manhattan’s decline has been much less. Miller Samuel reports that the peak price per square foot was $1,289 in the first quarter of 2008 and declined to $996 in the third quarter of 2009. This represents a 23 percent decline or about half the decline of comparable large US cities.

Third quarter 2009 data shows prices are now declining at a lower rate while transaction volume surged 46 percent, a sign that the Manhattan market is already finding its bottom. I expect it to decline another 10 percent with an eventual U-shaped recovery. But the duration of decline and magnitude have been less than at comparable major cities.

Wall Street firms are expected to pay a record $140 billion in bonus this year, attributable to the stock market, an easing credit market, an increase in deal making and government programs, according to the Wall Street Journal. This is despite the recession and an unemployment rate at a high 10.3 percent in New York City. Regardless of whether these bankers deserve the lavish bonus, this will boost Manhattan real estate prices.

Manhattan is a landlocked island. While developers in most cities keep expanding outwards, developers in Manhattan do not have this alternative. Yes, we can expand upwards but with such stringent regulations, it is easier said than done.

Capital of the World
Manhattan is a global must-see destination. Emerging markets like Brazil and China are creating wealth at a very high rate and churning out millionaires perhaps by the week. New York is often the first international destination these new millionaires from emerging countries would want to visit. It’s also one of the first places where they would buy investment property or a pied-a-terre.

Diversity of Industries:
While Finance was the dominant industry in New York a decade ago, the current economic landscape is more diverse. Beside Finance, New York is established in Media, Hospitality, Advertising and Professional Services like Legal and Accounting. These industries will be selling to emerging market economies and will benefit the local New York economy in terms of job creation and housing demand.

The City’s unemployment rate was at a high 10.3 percent in August. If not for the diversity of the current New York City economy, the unemployment rate would be even higher. Eastern Consolidated reports that the securities industry lost 1000 jobs in August and a cumulative 31,200 jobs since November 2007. However, sectors like education, health, leisure and hospitality gained jobs which partly offset the negative impact of the financial job losses.

Quality of Life
The air in Manhattan is pristine compared to air in China or Hong Kong. Transportation, although via a 100 year old subway system, is still efficient and dramatically reduces commute time for those living in Manhattan. The legal system is established and there is better work-life balance, again compared to China. These are major considerations for attracting global talent.

What To Do
For the investor expecting the coming inflation, gold is at a high of $1060 an ounce. Of course it could increase to $2000 as per Jim Rogers. However, gold is not income producing. Manhattan residential real estate, backed by the points above, has a net rental yield of 4 percent and still benefits from rental income and price increases. Similar to gold, real estate prices and rental income will increase with inflation. One can live in real estate. There is no practical use for gold.

For the primary residence buyer who is still renting, the value of your saved dollars is getting weaker. The US Dollar Index is now at 75, down from 88 in March, reflecting the world’s pessimism about our currency. Rents will increase. Start shopping for real estate. It’s better than sitting on a pile of cash with weakening buying power.

Contact Wei Min at tan@castle-avenue.com on how we can help you grow wealth through Manhattan property.

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