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Banking on Chicago

Feb 2, 2017 | Property Investment

If you are in the market for international buy-to-let investments, the Windy City in the US offers a great value proposition

Home to more than 2.7-million residents and another 10-million in the surrounding metropolitan area, Chicago — the Windy City — is a leader in technology, communications and transport. It has one of the world’s busiest airports in O’Hare International Airport and the largest number of railroad freight and highways in the US. According to American real estate investment management firm Home Union, the city is the third-largest American economy and hosts that country’s largest labour pool. That presents a strong market for buy-to-let property investors given the high demand for rental properties.

IP Global Africa director George Radford says condominium prices remain significantly below prerecession peaks. However, there is a severe inventory shortage with housing permits— the permission to construct — 24% below the eight-year average. Average monthly rentals grew 7.9% in 2015, meaning the city offers “a great value proposition”.

Cheap valuation

Echoing Radford, the UBS Global Real Estate Bubble Index for housing markets in selected world cities 2015 stated that Chicago real house prices were still 31% below their 2006 peak and had only begun recovering in 2013. However, that recovery remained comparatively weak, dragged down by the sluggish local economy.

The investment group’s cheap valuation rating was supported by the lowest price-to-income and price-to-rental multiples across the 20 cities selected in its survey. In the Urban Land Institute and PWC Emerging Trends in Real Estate 2016 report, Chicago fell out of the top 20 to number 26 in the markets to watch survey. 

 

There is a severe inventory shortage with housing permits 24% below the eight-year average and average monthly rentals growing 7.9% in 2015” George Radford, director, IP Global Africa

In the Urban Land Institute and PWC Emerging Trends in Real Estate 2016 report, Chicago fell out of the top 20 to number 26 in the markets to watch survey. The report said this was more likely attributable to pricing and not to Chicago’s relative attractiveness.

Foreign capital

Radford says that in the past two years in Chicago, technology jobs have grown nearly 20%. In addition, China’s largest private property developer, Wanda Group, has secured the rights for an $800m (R10.6-trillion) mixed-use development. In August last year the city announced a $1.7bn expansion of its rail capacity. Writing for Chicago Business online in December last year, journalist Ryan Ori said more foreign capital had poured into Chicago real estate in 2015 than ever before. International investors had paid $3.27bn for properties by the beginning of December, significantly above the full-year record of $2.18bn set in 2013.

This meant international buyers accounted for 16% of sales in Chicago last year, with Ori attributing the attention to low interest rates, readily available debt and relative uncertainty in other parts of the world. However, the investment opportunities come on the back of economic issues from which Chicago is slowly recovering. Housing data and analytics group RealtyTrac says there are currently 13,500 properties in some stage of foreclosure and another 4,500 listed for sale. The July foreclosure figure was 18% below that for June and 36% lower than the same time last year, reflecting both the opportunities for investors and the difficulties the city faces.

Recession

Writing in the Chicago Market Report Second Quarter 2016, Home Union research director Steve Hovland says Chicago is among the last American metropolitan areas to emerge from the recession. The city’s rental market is forecast to improve steadily as the economy continues its recovery and job growth is expected to exceed 2015 as several companies relocate and consolidate into Chicago. These include global food group Kraft Heinz closing the Oscar Mayer plant in Madison and food group ConAgra shifting its headquarters to Chicago.

Hovland says the development of the Marriott Marquis Hotel and renovations to the Wrigley Field baseball park are generating thousands of construction, leisure and hospitality jobs. In terms of property developments, permitting activity has reached its highest levels since the economic downturn, although developers are focused on multi-family projects. Most units are coming online in The Loop and Streeterville/River North sub-markets, which Hovland says limits the impact on single-family rental operations in suburban areas.

Rental growth

In Q1 2016, developers concluded an annualised 7,900 single-family and 8,900 multi-family permits and Hovland expects rentals to grow 4.6% to a monthly average of $1,972. He also expects buyers chasing above-average rental demand and high occupancy rates to find properties in the Central Cook County, Lincoln Park/Lakeview and South Cook Country sub-markets. Earlier this year, Chicago’s One Arlington development, a luxury multi-family property created from the conversion of a former Sheraton Hotel, received a $50m loan from Square Mile Capital Management for refinancing. That property features 214 residential units, 1,598m2 of ground floor retail space and 313 underground parking bays.

When the deal was announced, Square Mile principle Matthew Drummond said that One Arlington represents the first phase of “an exciting master-planned urban redevelopment” overlooking the Arlington Park race track. “Elevated asking prices are reshaping the investment landscape across the Windy City,” Hovland said in the company’s Q4 2015 report.

Credits: Photo: iStock, Text: Nicola Jenvey 

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