When the year 2016 came by, everybody in the investment universe was talking about its prospects. Now, two and a half months later, there’s a general consensus that it is not going to be good. Stocks are expected to remain flat, as S&P is bound to FED’s decisions about rate hikes and the oil crisis reappeared stronger than the last time, a few months ago, not to mention the recent China’s slowdown and debt bubble growing dangerously. Bonds on the other hand, are considered to be in a worse position than stocks, according to professionals in the industry. So an obvious question arises: Where should an investor put their money in 2016?
According to the majority of the participants in the investment universe the answer is boringly simple: Real Estate. Traditional international investment destinations, regarding real estate investments, such as London, Paris, Tokyo, Sydney, San Francisco and Los Angeles will remain at the top of the investors’ shortlists this year, as traditional investment market volatility leads funds to search for long term, fundamentally driven investments. According to Colliers International Global Investor Outlook 2016, Los Angeles is expected to remain one of the hottest investment markets in the U.S., attracting funds from international investors and investment funds.
Being compared with its major overseas peer, London, Los Angeles upper class residential developments can be considered as better investments for several reasons. Although London luxury real estate market in particular has been considered without a doubt as a safe haven of international real estate investment, there are some market and non – market risks today that threaten to alter this status quo. These risks range from unfavorable local market equilibrium conditions to complex political, diplomatic and economic concerns arising from the scheduled referendum regarding Britain’s stay or not in the European Union, which will boom uncertainty.
Map 1: Rent performance in Los Angeles (2015)
According to Douglas Elliman report, we are currently in the middle of a strong upside movement in the Los Angeles real estate market, which is expected to last for a few more years. One of the hottest areas in terms of market fundamentals is Sunset Strip, with market gaining heat rapidly. There has been a spectacular price growth in the area as the following chart shows, with prices rising by 10% over the last 6 months and more than 20% during the last year. Same picture in Venice Beach and Beverly Hills with price movements ranging from 16% to 20%.
Such spectacular movements are driven partially by market fundamentals. However, a part of this performance should be attributed to the recent rise in on – demand short term real estate through online platforms such as Airbnb and others. Fuelled by the increasing popularity that on – demand real estate is gaining, it has been observed that homeowners / investors could achieve significant higher than average returns by chasing short term rentals. Of course, nothing should be left on luck, as there are specific property management firms that have recently become experts in this kind of property management.
Recent transaction data confirm the price trends presented above, as triple digit transaction volume figure increases are not something that is found in a typical property market.
Table 1: Luxury properties sold in LA (May – July 2015)
According to industry’s professionals, Los Angeles offers some comparative advantages compared to the city’s competitors, in the U.S. and overseas. Luxury properties are usually purchased by Ultra High Net Worth (UHNW) individuals. Los Angeles offers an adequate mix of luxurious amenities and lifestyle for this kind of people. From the luxurious Beverly Hills to the cosmopolitan Hollywood, and adding some extra life quality perks, such as the high quality schools of Santa Monica and Westwood, L.A. is the place to live. This prestigious profile, along with the specialized workforce, is also attracting famous tech companies in the area, like Google campus in Playa Del Rey.
So, overall Los Angeles has managed to sell a luxurious and cosmopolitan profile which, in combination with favorable fundamentals of the local real estate market and the recent rise of on – demand short term rentals, is responsible for the current and ongoing boom in the prices of luxury properties. In that sense, international investors seeking capital security and extraordinary price appreciation should definitely consider an investment in upper class properties in L.A. instead of its traditional local and overseas competitors.