American land lures Aussie investors. But is it a safe bet?

Since Australian housing started on its natural downward trajectory, as occurs when we enter the slower phase of the property cycle, industry spruikers have come out of the woodwork in their droves to pray on the fears of novice investors.

There have been countless schemes and strategies bandied about as the next big thing, but perhaps the most common tune being sung is that of American housing as a veritable goldmine of opportunity for Aussie investors.

The latest to throw his weight behind US property is Melbourne real estate veteran Michael Drapac.

According to a Sydney Morning Herald article, Drapac has spent the better part of two years studying the American market and says conditions over there are currently perfect for property professionals to make in-roads.

Is this a once in a lifetime opportunity?

”In more than 30 years as a developer, I have not seen anything quite like it. For property professionals, America is back where Australia was in 1992 – in some areas, even better,” he told BusinessDay.

By now, everyone is aware of the massive crash that occurred in America’s housing sector during the GFC. Drapac argues that the slowdown in residential development in the US due to the financial scare late last decade is resulting in never before seen investment opportunities.

Since 1950, the US has averaged more than 1 million new houses annually, but in the past three years, that number has fallen to 500,000 a year.

”The US will have its biggest land shortage in history. The property market must come back at new house level – Americans will always want a new house,” he said.

New land subdivisions are becoming as rare as hen’s teeth in many American cities, including big towns like Chicago, Detroit, Atlanta, Los Angeles, Phoenix, Seattle and parts of Florida, where Drapac has been taking the most interest.

”The entire industry – land for land subdivision – has never been lower. Anecdotally, Chicago has only done 65 lots in the past four years. Detroit has had no new subdivisions in three years – a monumental historic event,” he said.

”In Melbourne, can you conceive of no block of land or high rise being developed for four years? Can you imagine that?”

Motown is the place to go.
Drapac believes Detroit in particular is a good representation of what’s occurring in the US with regard to a resurgence of confidence in the local economy.

Between 2000 and 2010, the much-maligned motor capital of America saw a decline in population of 25 per cent, taking it from the tenth largest US city to the 18th, with a total of 5.2 million people.

Now, says Drapac, all signs point to a Detroit city revival, with a growing perception that the region is making a big economic comeback instilling renewed confidence in the town. And, he says, it is confidence that drives markets.

So where does he see money to be made?

”Finished, subdivided lots are now less than $US20,000 in a good location. They used to be $US300,000-$US400,000 a block raw, but now they are $US13,000-$17,000 in upmarket locations,” he said. And that’s blocks of around 800 square metres.

He bought what he describes as a prime development site in Phoenix, only five minutes’ walk to the CBD, for only $US220 per sq m.

Indicative of his optimism in the US market, Drapac has increased his Stateside team to six, including his son Sebastian in Los Angeles, and expects this to rise to 10 in coming months as he plans on spending six months of this year and next in the US as he continues to buy in these cities.

”The focus is on consolidating important sites, consolidating land banks in residential and high-rise for next two years, and then to look at development,” he said.

While Drapac is certainly not short of a dollar, he says many Melbourne investors have approached him to back upcoming American acquisitions.

”There is the allure of a one in 100 years event in the US. The Australian dollar is high, and opportunities in Melbourne are relatively limited. They would like to capitalise on that.”

This type of investment endeavour is not for beginners though, warns Drapac, who says it’s all about professional investment opportunities rather than mum and dad dabbling

My thoughts:

Drapac is right – this is not “investing” – it is speculating, hoping a whole lot of events outside your control work themselves out and cause property prices to increase.

There are the tax issues, the currency pays, the fact that you can’t borrow for these properties and a whole lot of unknowns that make me steer clear of these markets.

For me, you can’t go past the boring but secure strategy of investing in inner city, prime locations around Australia’s proven capital cities.

You can read my thoughts in some of my blogs – US housing yet to hit bottom; Warren Buffet admits he was dead wrong on the US housing market and Do you really understand the size of the US debt?



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'American land lures Aussie investors. But is it a safe bet?' have 2 comments


    April 20, 2013 #

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