Houston Real Estate Market Ranks Top 5 Worldwide as Boom Continues

International real estate investors are falling in love with Houston, a fast-expanding energy hub that’s luring buyers from Toronto to Tel Aviv seeking properties with lower costs and higher returns than buildings in the priciest U.S. cities.

Firms from outside the U.S. acquired $2.83 billion of Houston (OFCRAHOU) office buildings in the past three years, according to Real Capital Analytics Inc. They were the largest net buyers of any investor class, spending four times more than U.S. real estate investment trusts, which ranked second. Last year, Houston for the first time was among the top five global cities in an annual survey by the Association of Foreign Investors in Real Estate that dates back to 1994.

“Houston has gained broad acceptance as a top-tier market,” said Greg Kraus, managing director at Atlanta-based Invesco Ltd. (IVZ), a global adviser for pension clients including QSuper Ltd., an Australian fund for public-service workers. “It’s reflected in job growth, more gas refineries, more oil out of the Houston port and a true international feeling.”

The boom in and around the fourth-largest U.S. city stretches from downtown high-rises and boutique offices in the Galleria district to the “Energy Corridor” along the Katy Freeway, where Texas’ Lone Star symbol adorns overpasses and construction cranes swivel beside a rush of commuter traffic.

Houston investors bullish on local economy

Houston-area high net-worth investors are more bullish on the state economy and more skeptical of the national and global economy than the average U.S. investor.

According to a Morgan Stanley (NYSE: MS) investor survey, Houston’s local investor base is more optimistic than the national average — and more in love with Houston real estate than even the city’s dominant energy sector.

Besides real estate, Houston’s favorite industry sectors for investment include energy, natural resources, technology, biotechnology and pharmaceuticals, the survey said.

Capitalization Rate

One of the first equations you will come across in real estate investing is Capitalization Rate (CAP Rate). The CAP Rate simply looks at the potential return of the investment. The higher the percentage, the larger your return. In its simplest form, it looks at the ratio of gross yearly income generated divided by the cost (value) of the property:




Example:
For instance, if we located a $310,000 property that was expected to generate $2100/month in rent, our gross CAP Rate would be:


Real estate investors use the CAP Rate in a similar manner in which stock investors use the P/E Ratio*. These formulas allow for basic, quick calculations to be made to help a person quickly determine if an asset is priced at an attractive valuation.

On the surface, a company sporting a P/E Ratio below 10 usually looks to be cheap. Similarly, a CAP Rate of over 10% will look to be a good deal.

Home Sales Continue to Climb

The National Association of Realtors reported home sales edged up 0.6% to an annual pace of just under 5 million homes. Compared to a year ago, the pace of sales was up nearly 10%.

The pace of sales would have exceeded that level were it not for tight credit and insufficient houses for sale to meet rising demand, the group said.

"Without these frictions, existing-home sales easily would be well above the 5-million unit pace," said Lawrence Yun, the Realtors' chief economist. He said that customer traffic is up 31% compared to a year ago, showing greater demand than actual sales.

The recovery in the housing market so far this year has been a major driver of overall economic growth, lifting not just the pace of home building but also retail sales. Near record low mortgage rates coupled with improving unemployment, a drop in foreclosures and a tight supply of homes for sale have all combined to lift home prices.

The median price of a home sold in April was $192,800, up 5% from March and 11% from a year ago. And the number of homes on the market represented a 5.2-month supply at the current sales pace. While that is up from March it's down from a 6.6-month supply a year ago.

The percentage of sales considered distressed sales -- homes in foreclosure or short sales in which the seller owes more on the home than the selling price -- now represents only 18% of sales, down from 28% a year ago.

The pace of new home sales has been rising every month for nearly two years. The latest sales reading is the strongest level since November 2009, when sales were inflated by a short-term home buyer's tax credit.

Cash-On-Cash Return

Definition of 'Cash-On-Cash Return'
A rate of return often used in real estate transactions. The calculation determines the cash income on the cash invested.
Calculated as follows:




'Cash-On-Cash Return' Explained
For example when you purchase a rental property, you might put down only 10% for a cash down payment. Cash-on-cash return would measure the annual return you made on the property in relation to the down payment.

Assessed Value

Definition of 'Assessed Value'
The dollar value assigned to a property for purposes of measuring applicable taxes. Assessed valuation is used to determine the value of a residence for tax purposes and takes comparable home sales and inspections into consideration. It is the price placed on a home by the corresponding government municipality to calculate property taxes. In general, this value tends to be lower than the appraisal fair market value of a property.

Bahrain's Investcorp Spends $200 Million On US Real Estate

DUBAI —Investcorp, a Bahrain-based investment firm, bought five office properties in the Washington, D.C., Denver and Houston metropolitan areas for about $200 million through its U.S.-based real estate arm, it said on Tuesday.

The properties total more than a million square feet and are located in "markets characterized by economic growth and low unemployment," the company said in an emailed statement. The three properties are the Tysons Commerce Center in Tysons Corner, Virginia, Westmoor Place in Denver and One Westchase Center in Houston, the statement said.

Fannie Mae Profits Reach Record $17.2 Billion In 2012

WASHINGTON — Home prices are up. Foreclosures are down. Construction is up. And now comes the latest sign of the U.S. home market's revival: Fannie Mae, the mortgage giant that nearly collapsed five years ago, has earned its biggest yearly profit ever.

Fannie Mae earned $17.2 billion last year and said Tuesday that it expects to stay profitable for "the foreseeable future." It also paid $11.6 billion in dividends to the U.S. Treasury in 2012.

And last year was Fannie's first since its takeover by the government in 2008 that it asked for no federal aid. As recently as 2011, Fannie lost nearly $17 billion and requested and received nearly $26 billion in aid.

The speed of Fannie's resurgence is a testament to a much healthier U.S. mortgage market.

Houston top five global city for real estate investing

Strong property investment interest from firms outside the US has propelled Houston amongst the top five global cities for the first time last year, according to an annual survey by the Association of Foreign Investors in Real Estate conducted since 1994, Bloomberg reported on March 26. The fourth largest city in the US appeals to foreign property investors with lower costs and higher returns compared with the priciest US cities, the newswire noted.

A top-tier market
According to New York-based market researcher Real Capital Analytics Inc., foreign companies were the largest net buyers of any investor class, spending four times more than US REITs, which came in second. The increased international interest has created “true international feeling” in the fast-expanding energy hub and also benefited other sectors of the local economy, explained Greg Kraus, managing director at Atlanta-based Invesco Ltd. (IVZ). “Houston has gained broad acceptance as a top-tier market,” Kraus said, as quoted by Bloomberg. “It’s reflected in job growth, more gas refineries, more oil out of the Houston port and a true international feeling.”