As the global real estate sector is on the recovery path after last year’s fallout from the COVID-19 pandemic, could you break down some of the properties you are working on at the Walton International Group?
We have been fortunate that the pandemic has driven a significant increase in the U.S. housing market with demand, fueled by a historically low-interest rate environment and work from home policies, continuing to outstrip supply. There have also been changes in the home building industry with a focus on ‘just in time inventory’ which has encouraged us to evolve our land investment model to suit both investors and homebuilders and align our interests. As a result, we are working on the acquisition of land assets in high-growth regions of the United States, with signed interest from public homebuilders who are keen to secure future development land inventory in markets where they are already active, to meet the increasing demand from homebuyers.
One of these properties is Pinehill’s Trails located in the Atlanta MSA, Georgia; a 652-acre property currently approved for 1,300 single-family detached homes expected to be developed from 2022 – 2027 by two national homebuilders. One of the homebuilders is already selling homes in a master-planned community adjacent to the property, so it is a natural progression for them to move their activity onto this property. The interest from homebuilders at the time of our acquisition of the asset is important and goes a long way to validating the due diligence conducted by the Walton Group of Companies and our external partners before the asset acquisition. Our due diligence work is shared with the interested homebuilders and is crucial in securing this interest upfront while also helping to mitigate risk for our investment partners who are then able to see a pathway to the sale of the asset.
In reference to Walton International Group’s plans for the next few years, are they set in stone, or are they beholden to which way the wind blows in the real estate market in the United States?
As referenced above, our investment model has evolved in response to the changing U.S. homebuilding industry, and with this being ever-fluid, we will continue to adapt accordingly to different trends and opportunities. Today’s exceptionally strong housing market is likely to continue as low-interest rates and pent-up demand drive prices higher. The medium-term pressure will ease as supply chains recover from Covid and builders scale up operations.
Nevertheless, underlying demand is likely to be buoyant for the coming decade as a generation of millennials reach their peak home-buying years and seek more space in the suburbs. In particular, locations with a lower cost of living, employment opportunities, lower taxes, good quality of life and better climates have seen an acceleration in demand since the pandemic. This, paired with our strategy which aligns our investors’ returns with the phased development and home sales activity of the homebuilders, is a model which is sustainable even if there is a slowing of home sales activity in the future. It is also worth noting that, unlike the last housing boom in the lead-up to the sub-prime crisis and the real estate crash that followed, the typical warning signs of too much leverage in the market and over-supply do not exist today.
With remote working and homeschooling likely here to stay, how are these trends driving investment in the US property market and do these trends differ from other real estate markets such as Dubai, Hong Kong, or London?
The current US housing boom has been because of several factors, but the Covid pandemic has accelerated demand without question. With more and more of the U.S. population re-considering their options due to homeschooling pressures and work from home policies being adopted far more readily, young, millennial homebuyers are now ready to purchase their first or move-up homes in the suburbs. Their ability to move into good school districts, enjoy more space and not have to commute every day of the week is fueling demand outside of the city center locations where they were previously renting.
Remote working and affordability trends in other cities such as London and to a lesser extent, Dubai, may see similar outcomes, particularly in the case of London where home prices are extremely high. More and more young families may consider a move into outer suburban locations where space and quality of life are available and have become increasingly important. Having lived in Hong Kong for most of my working life prior to my move to Dubai in late 2019, it is a very different market, and the same forces are not necessarily at work due to the constrained land supply and lack of alternative residential options, although of course, price pressure will always drive any population towards relative affordability. In Dubai, the real estate headlines suggest that affordability, and a desire for more indoor and outdoor space, have fueled the market for Villa developments. With a progressive government implementing policies to make it easier to live, work and potentially retire in Dubai, more professionals and entrepreneurs may consider the city as a base and invest in Dubai property as a result.
How much has the United States real estate market changed since the outbreak of the pandemic and where do you see opportunities in the future?
The pandemic has accelerated demand in the residential sector, and as a result, national homebuilders have seen a significant jump in home closings and quarterly earnings throughout 2020 and into this year. Single-family housing starts in 2020 totaled 991,000, an increase of 11.7% from the previous year and for Q1 2021, they are up 19.6% compared to Q1 2020. A longer-term, pre-pandemic trend that provides plenty of opportunities for the future has been the homebuilding industry’s move towards securing development land/lots through Option Agreements, rather than the traditional ‘land banking’ model of the past. This allows national homebuilders to align their land acquisition and home sales activity, thus allowing them to better manage their balance sheet exposure to long-term land assets. Working with these homebuilders, The Walton Group of Companies can provide the land inventory required, allowing the homebuilders to take it down on a phase-by-phase basis, and in turn, provide a cash flow model for our investors who benefit from annual distributions as the lots are delivered to the homebuilder and homes are built and sold.
The Biden administration plans to nearly double capital gains tax for the wealthy, how do you expect this tax proposal to impact real estate investors?
I think it is too early to predict the impact of these proposals. On the one hand, it looks like the tax would be levied on real estate profits of more than $500,000, which is more likely to impact the ‘move up’ and wealthier segment of the market. At the same time, Biden is also looking at bringing in a USD2 Trillion infrastructure spending package which is likely to benefit regions of the U.S. where strong population and employment growth is already taking place, and housing alone could see around USD200 Billion injected into the sector.
There has been an increase in Middle East investors snapping up real estate assets in North America and Europe, in your view what is driving this appetite for investment in these regions?
Middle East investors, like any others, are always looking for opportunities to diversify their investment portfolios, by asset class, sector and geographically, so with the strong real estate market, it makes sense to consider investing in the U.S. The U.S. enjoys a robust legal framework and Title ownership system which makes it an attractive market to invest in real estate opportunities. Depending on the holding structure, the tax treatment upon disposition of long-term U.S. real estate assets (held for more than 12 months) has also been relatively favourable, and not as punitive as many might think. The Walton Group also boasts a Shariah-compliant structure which we can offer to investors seeking Islamic Finance solutions, which is an advantage in this region. Overall, the U.S. is a robust market to consider for savvy investors and is still the land of opportunity.