Foreign buyers' make-up changes dramatically in NYC

Real Estate Weekly, April 14, 1999 by Seth Cohen, Dan Levitan, Gordon Shanks

Gertrude Stein once wrote that, "Money is always there, but the pockets change." Well, foreign pockets have always accounted for a large portion of the money that pours into New York residential real estate each year. And Stein was right: the pockets have changed dramatically over the past year, as investors from some nations have virtually dropped out of New York and others have surged in.

There are few reliable sources for numbers that sum up total foreign purchaser activity in New York's residential real estate market. However, HMAC helped foreign buyers finance $80 million in mortgage loans in New York in 1998. We can use this activity to paint an accurate picture of the trends that are shaping this market.

Japan

Remember when the Japanese kept New Yorkers spellbound with the increasingly high prices they paid for each new purchase? Well, home prices have continued their half-decade rise in New York, but the Japanese purchase market has been cut by more than 50 percent just over the last year.

However, the news is not all bad. Last year also saw the Japanese refinance market, which was practically non-existent one year ago, grow so quickly that it has made up for 15 percent of the drop in new purchases.

The explanation? Those purchasers who were able to retain their New York properties have seen them appreciate, thus building equity. Refinancing allows the owner to take that equity out of the property at today's low mortgage interest rates. That money can then be re-invested at home, where many real property and other assets are considered undervalued due to the prevailing economic malaise. As an added incentive, the yen has lost so much value against the dollar that repatriating money from the U.S. is highly lucrative for Japanese investors.

Brazil

Over the last year, Brazil has been one of the top two countries of origin for foreign investors in New York City, accounting for 25 percent of the mortgages that we processed at HMAC. Brazilian buyers come to the U.S. to diversify their investments. Many Brazilians are not alone in considering New York City a safe harbor where they can invest their money at a safe distance from the political and economic uncertainties at home.

Brazilians spent all of 1998 well in the lead of other South American countries as a source of investment in New York residential real estate. However, the first quarter of 1999 saw a sharp downturn in their activity. A 60 percent devaluation in the nation's currency, the real, is the culprit.

Hong Kong

Hong Kong was tied with Brazil as the source of the most foreign investment in New York throughout 1998. Hong Kong Chinese customers accounted for one-quarter of HMAC's business with foreign buyers.

The close-knit, family-oriented style that often characterizes Hong Kong Chinese business practices means that these investors sometimes operate in a unique fashion. We may work with a younger, American-educated family member who is also a U.S. resident. While these individuals can be prosperous and well-educated in their own right, it is not uncommon for them to invest in a property that would be well beyond their means, if it were not for funds sent to the U.S. by other family members abroad.

Purchases made in this way generally serve as family investments. Again, the motivation is to protect the family's wealth from political uncertainties at home.

Israel

As Japanese buyers have dropped out of the New York real estate market, Israelis have surged in. Due to a significant change in Israeli law, it is no longer illegal for citizens of this Middle Eastern state to own real property outside of their borders.

Many of the Israeli buyers who have plunged into the world of New York real estate are not purchasing at the highest end of the market. Instead, they tend to purchase mid-range properties.

While making up a smaller share of HMAC's foreign buyer activity than Brazilians or the Hong Kong Chinese in 1998, the Israelis certainly made up the fastest growing group of buyers.

Seth Cohen, Dan Levitan and Gordon Shanks Managing Directors Home Mortgage Acceptance Corp.