Rental markets are currently strong in many global cities, including Sydney, London, New York and Hong Kong. But that doesn’t necessarily mean it’s the right time for buy-to-let investors to act in these markets, experts say.
While there are several factors and data points for potential buy-to-let investors to consider, Gary Malin, the president of New York-based Citi Habitats said that the first thing that investors should take into account is their time horizon—meaning how long they plan to hold the investment—and what sort of returns they need to make for the investment to work for them.
An investor who pays all cash and can hold the property even if the market changes will obviously have much more flexibility than someone who needs to finance their purchase and expects immediate returns.
"This is always a personal decision," he continued, "but the most important thing is for investors to understand the rental market’s dynamics before they pull the trigger."
Regardless of the city, the first factor that a potential investor should consider is how that rental market is doing and what direction it appears to be headed, based on historical trends and current dynamics.
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Within this factor, investors should analyze the city’s vacancy rate, or the percentage of total rental units that are available across the city. This figure provides a sense of how tight the rental market currently is, experts say.
They should also look at the city’s annual rental yield, calculated by dividing annual rental income by the property’s overall value, and multiplying that figure by 100. The gross yield is figured before expenses are deducted, while the net yield is calculated after transaction costs and other expenses are considered.
For instance, an apartment that was purchased for $1 million and generates $42,000 in rental income per year has a gross yield of 4.2%. But with annual expenses, including management fees, maintenance and insurance, the net yield might drop to 3.5%—still a figure that’s well above most cities’ mortgage rate. While the gross yield in many top cities tends to hover around that 3% mark, the net yield is actually the more important figure for investors to consider, because it provides a realistic snapshot of how much rental income they can expect to generate each year after expenses.
Investors can study how vacancy rates and rental yields have performed over the last five or 10 years to get a sense of potential highs and lows for each figure. They can then consider current market factors that might impact specific segments of the rental market, and find where there is any undersupply or oversupply, which might impact their ability to get a good return.
After analyzing these data points specific to the rental market, investors should consider how property values are trending in the city, and the expected capital appreciation of the investment time horizon, experts say.
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They’ll also want to consider the total property costs associated with any property, which include stamp duty taxes and other property taxes that are incurred at the time of purchase or the time of sale; legal fees; and the expected renovation budget and cost of regular upkeep. Purchasers who need to finance their buy should also consider the mortgage rate.
In many cities, like Hong Kong and London, stamp duty taxes have make it increasingly difficult for foreign buyers to purchase property as an investment vehicle—especially if they don’t plan on holding it for any significant length of time. In many of these cases, investors who are more interested in capital appreciation on long-term property holds—not just high rental returns—will do better.
Because these investors are considering buy-to-let potential, the next factor they should review are what neighborhoods and property types are most likely to attract a regular and growing rental pool.
On-the-ground brokers in the city of interest can provide detailed information about what neighborhoods are on the upswing, and what sorts of properties high-net-worth individuals are likely to rent.
It’s always a good idea to consider how close properties are to air and ground transportation, business districts and schools, as many high-net-worth tenants are likely to be temporarily relocating to the area—with or without their families—for work.
With these factors in mind, the following is a simple breakdown of buy-to-let investment potential in Sydney, London, New York and Hong Kong.
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Sydney: Invest now, as the city continues to grow and more people relocate.
According to Mark Meyer, director of the LJ Hooker Double Bay agency, the Sydney property market is currently red hot, and only going up. "Sydney is still a fairly young city," he said, "and what we’ve seen in the last five years is a dramatic change."
Prices in the rental market, of which 40% to 45% of housing is located, have doubled, Mr. Meyer said, noting that he expects this trend to continue as first-time home buyers are priced out of the sales market. "We’re going to see even more investors and renters going forward," Mr. Meyer said.
An influx of high net worth business people, who are temporarily relocating to Sydney for work, are also more likely to rent rather than buy, which points to increased demand in the luxury sector.
Right now, Mr. Meyer said, the overall vacancy rate is sitting just below 2%, although in some areas, it’s as low as 0.8%, which points to incredible rental demand. The tightest market is somewhere in the A$650 to A$1,000 per week range (US$1,960 to US$3,015 per month), although harborside suburbs to the north and east, in which luxury rental apartments cost up to A$15,000 per week (about US$45,000 per month) are also in demand, if there are views and solid transportation options.
When it comes to what type of property to purchase, Mr. Meyer made a case for a new luxury apartment over land and a house. "The returns are much greater in apartments, and it’s a much more fluid market," he said.
At 8%, overseas investors will have to pay a higher stamp duty tax rate than local buyers. They’ll also have to pay a higher land tax surcharge. Together, these factors make it advantageous for investors to consider a long-term property hold, in which they can expect solid appreciation and capital growth.
"Because Sydney is only just maturing as a city now," Mr. Meyer said, "we expect to see this growth continue."
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London: High stamp duty taxes and Brexit uncertainties diminish buy-to-let investment potential.
In London, "rents are good, but yields are low," said Gary Hersham, principal at Beauchamp Estates.
Although gross yields across prime central London are 3.2%, said Tom Bill, the head of London residential real estate at Knight Frank, and showing slight upward movement, the high cost of stamp duty land taxes, which top out at a marginal rate of 12%, and include an additional 3% tax for second-home buyers and foreign buyers, make this investment a difficult one for many to stomach.
Other governmental changes expected over the next few years will also make it impossible for domestic buy-to-let investors to get any mortgage tax relief on rental income. The result will be that this type of investment becomes much more palatable for cash buyers who are more interested in accruing equity than leveraging a mortgage, experts say.
Even with these considerations in mind, there are some signs that now would be a good time for cash investors to buy with the intention of letting that unit, Mr. Bill said, with a particularly interesting case for units that rent for less than £1,000 per week (US$1,339) or more than £5,000 (US$6,696) per week, where there is less supply and increasing demand, he said.
"We’re currently experiencing a sort of turning point that’s slowly moving the rental market from the tenant’s market to a landlord’s market," Mr. Bill said, noting that the sales market, which has likely hit its bottom, is also likely to start improving in the next year or two.
Robert Cox, a sales manager at Harrods Estates agreed. "You’re very much buying at the bottom of the market right now," he said, adding that when you consider a 2.5% to 3.5% gross rental yield, combined with the capital growth that’s expected to pick up over the next two or three years, you’re looking at a sound investment.
The only caveat is that investors should plan on holding the property for a minimum of three to five years to see returns they’ll likely desire, he added.
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New York: Want quick cash? Forget it. A long-term investment? Go for it.
Like purchasers in London, New York investors who want to rent out their property acquisition should plan on holding it as a long-term investment with the potential for solid capital appreciation, rather than relying on substantial rental returns, Mr. Malin said. "I don’t think it’s ever a bad time to buy an investment property in New York, as long as the buyer is aware of the current market conditions," he said.
Right now, the vacancy rate is hovering around 2%, which most cities would consider incredibly tight. But in Manhattan, a normal market is closer to 1.5%, give or take, Mr. Malin said.
Additionally, the rental market is incredibly price sensitive right now, Mr. Malin said, with a lot of incentives, such as a month or two of free rent, being offered by landlords to entice clients to act. Investors who finance their purchase and don’t have any buffer might find the market dynamics too challenging for them to act.
For investors who have more flexibility and can commit to holding the property for five years, Mr. Malin recommends that they look for a luxury condo that is unique within its submarket, such as a three-bedroom West Village penthouse in a boutique condo building, with a ton of outdoor space. "You want to deal with as little competition as possible," he said, "and it’d be very hard—if not impossible—to replicate that."
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Hong Kong: Forget buy-to-let investments, especially if you’re a foreign purchaser.
In Hong Kong, where stamp duty taxes can reach 23.5% for foreign investors, and additional sales taxes for properties sold within three years can add another double-digit tax bill, a buy-to-let purchase is often untenable, said Nicole Wong, the regional head of property research at Asian market and investment group CLSA.
"This is not a very interesting investment for non-local buyers," she said, noting that the only exception would be if a buyer paid cash under a limited liability company, although there are a whole other set of rules and restrictions to consider for this type of buy.
For local investors, there are some cases in which they can expect solid capital appreciation if they hold a property for long enough, and purchase in an area where rental prices are on the rise.
At present, vacancy rates are at a 20-year low of 3.7%, Ms. Wong said, and gross rental yields are at 3.8%. However, if investors deduct all their costs to come up with their net yield, it’s likely closer to 0%, Ms. Wong said.
Gross yields in the luxury market are even lower—about 2.5% for a property that would cost the equivalent of US$4 million, with no sign of price appreciation in this submarket—and 1% for properties that would cost US$8 million, although this type of "collectible," is more likely to appreciate, because they’re favored by well-off mainland Chinese buyers.
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Adam Yang, a Shanghai-based overseas real estate analyst at Juwai.com, generally agreed with Ms. Wong’s market assessment, adding that "smaller units of less than 40 square meters (430 square feet) and larger units with more than 160 square meters (1,700 square feet) are the most popular in terms of price."
Domestic investors who want to enter this buy-to-let market might forgo a purchase on Hong Kong island, where prices are already incredibly high, and there’s no land to build on, and instead look in nearby, up-and-coming districts.
Kowloon, and specifically the area of Kowloon Station, is popular with mainland Chinese renters, in part because it’s near the train station to Shenzhen.
While in the New Territories—specifically in areas such as Discovery Bay and Sai Kung—there’s good long-term potential, Mr. Yang said.
"For renters, these areas are a good choice because the housing is newer, cheaper, and located near transportation facilities as well as bars and restaurants," he continued. "These are areas that will likely get quite popular."